International Currencies and Capital Allocation

50 Pages Posted: 11 May 2018 Last revised: 1 May 2019

See all articles by Matteo Maggiori

Matteo Maggiori

Harvard University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Brent Neiman

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Jesse Schreger

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: April 2019

Abstract

We establish that global portfolios are driven by an often neglected aspect: the currency of denomination of assets. Using a dataset of $27 trillion in security-level investment positions, we demonstrate that investor holdings are biased toward their own currencies to such an extent that each country holds the bulk of all securities denominated in their own currency, even those issued by foreign borrowers in developed countries. In fact, given the currency of a security, knowledge of the issuer’s nationality adds very little information about the holder’s nationality. While large firms can issue in foreign currency and borrow from foreigners, the vast majority of firms issue only in local currency and do not access foreign capital. These patterns hold broadly across countries with the exception of international currency issuers such as the US. The global willingness to hold the US dollar, an international currency bias, means that even small US firms that borrow exclusively in dollars have little difficulty borrowing from abroad. Global portfolios shifted sharply away from the euro and toward the dollar starting with the 2008 financial crisis, further cementing the dollar’s international role and amplifying the benefit that its status brings to the US. We rationalize these findings in a framework with downward-sloping demand for bonds in each currency in which firms pay a fixed cost to borrow in foreign currency.

Keywords: International Portfolios, Capital Flows, Home Bias, Reserve Currencies

JEL Classification: E42, E44, F3, F55, G11, G15, G23, G28

Suggested Citation

Maggiori, Matteo and Neiman, Brent and Schreger, Jesse, International Currencies and Capital Allocation (April 2019). Becker Friedman Institute for Research in Economics Working Paper No. 2018-30; Columbia Business School Research Paper No. 18-41. Available at SSRN: https://ssrn.com/abstract=3177074 or http://dx.doi.org/10.2139/ssrn.3177074

Matteo Maggiori

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Brent Neiman (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/brent.neiman/index.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jesse Schreger

Columbia University - Columbia Business School

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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