Krugman_IM_ch21 - Chapter 21 The Global Capital Market:...

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Chapter 21 The Global Capital Market: Performance and Policy Problems n Chapter Organization The International Capital Market and the Gains from Trade Three Types of Gains from Trade Risk Aversion Portfolio Diversification as a Motive for International Asset Trade The Menu of International Assets: Debt vs. Equity International Banking and the International Capital Market The Structure of the International Capital Market Growth of the International Capital Market Offshore Banking and Offshore Currency Trading The Growth of Eurocurrency Trading The Importance of Regulatory Asymmetries Regulating International Banking The Problem of Bank Failures Difficulties in Regulating International Banking International Regulatory Cooperation Case Study: When the World Almost Ended: Two Episodes of Market Turmoil How Well has the International Capital Market Performed? The Extent of International Portfolio Diversification The Extent of Intertemporal Trade Onshore-Offshore Interest Differentials The Efficiency of the Foreign Exchange Market Summary
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113 Krugman/Obstfeld • International Economics: Theory and Policy, Eighth Edition n Chapter Overview The international capital market, involving Eurocurrencies, offshore bond and equity trading, and International Banking Facilities, initially may strike students as one of the more arcane areas covered in this course. Much of the apparent mystery is dispelled in this chapter. The chapter demonstrates that issues in this area are directly related to other issues already discussed in the course, including macroeconomic stability, the role of government intervention, and the gains from trade. Using the same logic that we applied to show the gains from trade in goods or the gains from intertemporal trade, we can see how the international exchanges of assets with different risk characteristics can make both parties to a transaction better off. International portfolio diversification allows people to reduce the variability of their wealth. When people are risk-averse, this diversification improves welfare. An important function of the international capital market is to facilitate such welfare-enhancing exchanges of both debt instruments, such as bonds, and equity instruments, such as stocks. In discussing the growth of the international capital market, the chapter introduces an important concept, the policy trilemma. This is the notion that governments can not maintain more than two of the following three policy stances: fixed exchange rates, domestically oriented monetary policy, and international capital mobility. This is an important theme hinted at in many parts of the book. The capital market has grown in part because countries have sacrificed either fixed rates or monetary sovereignty to allow more capital mobility. Offshore banking activity is at the center of the international capital market. Central to offshore banking
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This note was uploaded on 01/20/2010 for the course INTLECON ECO401 taught by Professor Aishakhan during the Summer '09 term at Lahore School of Economics.

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Krugman_IM_ch21 - Chapter 21 The Global Capital Market:...

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