Famous Puzzles in International Finance
As if international finance is not puzzling enough, there are famous puzzles in international finance as well. Lucky for you! What I mean with puzzle is that empirical observations of the real world aren’t always compatible with the predictions of some theories.
This appendix discusses six well-known puzzles:
The home bias in trade puzzle: People have a strong preference for consumption of their home goods.
The home bias in portfolio puzzle: Home investors prefer to hold home equities.
The Feldstein–Horioka puzzle: Savings and investment are highly correlated at the country level.
The consumption correlation puzzle: Consumption is much less correlated across countries than output.
The exchange rate disconnect puzzle: Short-term volatility in exchange rates doesn’t reflect that of the fundamentals.
The purchasing power parity puzzle: ...