Abstract
This paper derives the demand for foreign bonds in a simple general equilibrium model in which the exchange rate is perfectly correlated with the terms of trade. A necessary condition for the demand for foreign bonds to be an increasing function of the domestic currency value of imports is derived. Earlier work shows that the demand for foreign bonds is an increasing function of imports if the domestic investor's degree of relative risk tolerance is smaller than one. The present paper shows that the demand for foreign bonds can be a decreasing function of imports if the degree of relative risk tolerance is smaller than one when the consumption expenditure elasticity of imports exceeds one.
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