Home Bias in Open Economy Financial Macroeconomics

This is a survey of the “home bias” puzzle: the well-documented fact that investors everywhere hold a disproportionate share of their wealth in domestic equities, bonds and bank assets, well beyond what standard portfolio theory recommends. Coeurdacier and Rey organize the literature into three broad classes of explanation – hedging motives in frictionless financial markets, asset trade costs, and informational frictions and behavioral biases – and give particular attention to a “new” macroeconomics literature they label Open Economy Financial Macroeconomics, which embeds non-trivial international portfolio choice into standard two-country DSGE models. Using such a model with both bonds and equities, they show that once real-exchange-rate risk is hedged through bond positions, the remaining equity position optimally hedges human-capital risk conditional on bond payoffs – a channel that, unlike the unconditional hedge used in earlier equity-only models, robustly generates home bias in both the model and in the authors’ own new cross-country evidence. The survey also reviews the transaction-cost literature (concluding that plausible costs are generally too small to explain observed home bias, except when diversification gains are themselves small), the literature on informational asymmetries and endogenous information acquisition, and behavioral explanations built on differences in investor beliefs. It closes by presenting new descriptive evidence on cross-border bond holdings, bank lending and institutional (mutual fund) holdings, and by arguing that “the home bias puzzle is now less of a puzzle” than it once was, while flagging major open areas – modeling the official sector, financial intermediaries, delegated investment and heterogeneous investors – for future work.

Structural Change, Land Use and Urban Expansion

This paper asks how cities grow in the process of structural transformation — specifically, whether urban expansion occurs at the intensive margin (higher density within a fixed area) or the extensive margin (larger area). The authors document and explain a persistent decline in urban density in France since 1870, and develop a spatial general equilibrium model in which endogenous land use — land allocated either to agriculture or housing — is the key mechanism linking structural change to urban sprawl.

Nicolas Coeurdacier | Macro Paper Warehouse

Home Bias in Open Economy Financial Macroeconomics

Structural Change, Land Use and Urban Expansion