Discussion paper

DP17334 International Capital Markets and Wealth Transfers

In periods of global stress, there are large movements in exchange rates and asset prices. Currencies of developed economies appreciate, with the US dollar appreciating the most. Global stock markets fall, but the US market falls by less. While the external balance sheet of the US is riskier and its net foreign assets fall, this effect is overturned by the dollar appreciation, resulting in a wealth transfer to the US. To rationalize these facts, we build a general equilibrium model with time-varying risk appetites that produces asymmetric portfolios. Richer countries have more appetite for risk, levering up their external portfolios by borrowing from poorer countries. Consequently, their net foreign assets fall in periods of stress, yet there is a wealth transfer from poor to rich countries due to currency appreciations. The model delivers time-varying currency risk premia, matches key asset pricing moments, and produces realistic external portfolios.


Dahlquist, M, C Heyerdahl-Larsen, A Pavlova and J Penasse (2022), ‘DP17334 International Capital Markets and Wealth Transfers‘, CEPR Discussion Paper No. 17334. CEPR Press, Paris & London. https://cepr.org/publications/dp17334