ABSTRACT
In this chapter, I provide a selective overview of recent research on the spectacular growth in international financial trade and its implications for the macroeconomic behaviour of open economies. The motivation for this research topic is quite basic, in that a driving factor in any open-economy macroeconomics model is the degree of international financial integration. This suggests that understanding the sources of the recent explosive growth in cross-border asset trade and the impact of the upscaling in gross and net international investment positions on key open-economy macroeconomic variables such as the trade balance and the real exchange rate is critically important for policy analysis. Accordingly, the goal of this chapter is to introduce the reader to some of the main results emerging from this fast-expanding research field. However, it is beyond the scope of this chapter to provide a comprehensive survey of the literature: the following material is intentionally selective and indeed heavily draws on my ongoing collaboration with Gian Maria Milesi-Ferretti of the International Monetary Fund.
