We argue that a higher share of the private sector in a country's external debt raises the incentive to stabilize the exchange rate. We present a simple model in which exchange rate volatility does not affect agents' welfare if all the debt is incurred by the government. Once we introduce...

We show that including distribution costs into a general equilibrium model of international portfolio choice contributes to explaining the 'home bias' in international equity investment. Our model is able to replicate observed investment positions for a wide range of parameter values, even if...