Discussion paper

DP8991 Country Size, Currency Unions, and International Asset Returns

Differences in real interest rates across developed economies are puzzlingly large and persistent. I propose a simple explanation: Bonds issued in the currencies of larger economies are expensive because they insure against shocks that affect a larger fraction of the world economy. I show that differences in the size of economies indeed explain a large fraction of the cross-sectional variation in currency returns. The data also support a number of additional implications of the model: The introduction of a currency union lowers interest rates in participating countries and stocks in the non-traded sector of larger economies pay lower expected returns.


Hassan, T (2012), ‘DP8991 Country Size, Currency Unions, and International Asset Returns‘, CEPR Discussion Paper No. 8991. CEPR Press, Paris & London. https://cepr.org/publications/dp8991