International Capital Market and Wealth Transfers

In times of global stress, stock prices fall, the US dollar (USD) appreciates, and the US suffers losses on its net foreign assets (NFA) position. We argue that this does not create a wealth transfer from the US to the rest of the world. The USD appreciation benefits US domestic assets, and the US wealth share actually increases. We generate these patterns within a model with deep habits in which a richer country is more risk-tolerant. The country's NFA position falls in times of stress, yet its wealth share rises. The model matches asset pricing moments and currency risk premia.