Trade in nominal assets and net international capital flows

Nominal assets play a major role in international financial markets, while trade in indexed bonds is limited. As a result, agents are exposed to both price and exchange rate uncertainty. Nonetheless, previous research on net capital flows has assumed the presence of a risk-free vehicle to intertemporal asset trade. In this paper we develop a general equilibrium intertemporal model with trade limited to nominal bonds and equity. We find that exposure to nominal risk dampens net capital flows, thus making economies effectively more closed. (C) 2000 Elsevier Science Ltd. All rights reserved.