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Country portfolios in open economy macro models

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  • Michael B. Devereux
  • Alan Sutherland

Abstract

This paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models. The method is widely applicable, simple to implement, and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset. It can be used in models with any number of assets, whether markets are complete or incomplete, and can be applied to stochastic dynamic general equilibrium models of any dimension, so long as the model is amenable to a solution using standard approximation methods. We first illustrate the approach using a simple two-asset endowment economy model, and then show how the results extend to the case of any number of assets and general economic structure.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 09.

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Date of creation: 2008
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Handle: RePEc:fip:feddgw:09

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Keywords: Econometric models ; Equilibrium (Economics) - Mathematical models ; Macroeconomics - Econometric models ; Monetary policy;

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  1. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International Financial Adjustment," International Finance 0505004, EconWPA.
  2. Cedric Tille, 2005. "Financial Integration and the Wealth Effect of Exchange Rate Fluctuations," 2005 Meeting Papers 282, Society for Economic Dynamics.
  3. Michael Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibiity," Discussion Papers in Economics at the University of Washington 0016, Department of Economics at the University of Washington.
  4. Coeurdacier, Nicolas, 2008. "Do Trade Costs in Goods Market Lead to Home Bias in Equities?," CEPR Discussion Papers 6991, C.E.P.R. Discussion Papers.
  5. Charles Engel & Akito Matsumoto, 2006. "Portfolio Choice in a Monetary Open-Economy DSGE Model," NBER Working Papers 12214, National Bureau of Economic Research, Inc.
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  8. Kenneth L. Judd & Sy-Ming Guu, 2001. "Asymptotic Methods for Asset Market Equilibrium Analysis," NBER Working Papers 8135, National Bureau of Economic Research, Inc.
  9. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," The Institute for International Integration Studies Discussion Paper Series iiisdp124, IIIS.
  10. Martin D D Evans & Viktoria Hnatkovska, 2006. "International Capital Flows Returns and World Financial Integration," 2006 Meeting Papers 60, Society for Economic Dynamics.
  11. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
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  13. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Journal of International Economics, Elsevier, vol. 80(1), pages 100-112, January.
  14. Alan Sutherland & Michael B Devereux, 2007. "Country Portfolio Dynamics," 2007 Meeting Papers 386, Society for Economic Dynamics.
  15. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," Trinity Economics Papers 20014, Trinity College Dublin, Department of Economics.
  16. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 743-764, October.
  17. Cedric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 9(Jan).
  18. Corsetti, Giancarlo & Pesenti, Paolo, 2005. "International dimensions of optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 281-305, March.
  19. Marianne Baxter & Urban J. Jermann, 1995. "The International Diversification Puzzle is Worse Than You Think," NBER Working Papers 5019, National Bureau of Economic Research, Inc.
  20. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA.
  21. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
  22. Cédric Tille & Eric van Wincoop, 2007. "International capital flows," Staff Reports 280, Federal Reserve Bank of New York.
  23. Samuelson, Paul A, 1970. "The Fundamental Approximation Theorem of Portfolio Analysis in terms of Means, Variances, and Higher Moments," Review of Economic Studies, Wiley Blackwell, vol. 37(4), pages 537-42, October.
  24. Michael B Devereux & Alan Sutherland, 2007. " Country Portfolio Dynamics," CDMA Conference Paper Series 0706, Centre for Dynamic Macroeconomic Analysis.
  25. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
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