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Solving for Country Portfolios in Open Economy Macro Models

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Author Info
Michael B. Devereux (Centre for Economic Policy Research, University of British Columbia, Hong Kong Institute for Monetary Research)
Alan Sutherland (Centre for Economic Policy Research, University of St Andrews)

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Abstract

Open economy macroeconomics typically abstracts from portfolio structure. But the recent experience of financial globalisation makes it important to understand the determinants and composition of gross country portfolios. This paper presents a simple approximation method for computing equilibrium financial portfolios in stochastic open economy macro models. The method is widely applicable, easy to implement, and delivers analytical solutions for optimal gross portfolio positions in any combination of 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.

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Publisher Info
Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 162007.

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Length: 28 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:hkm:wpaper:162007

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Related research
Keywords: Country portfolios; solution methods;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 765-783, October. [Downloadable!] (restricted)
    Other versions:
  2. Kenneth L. Judd & Sy-Ming Guu, 2001. "Asymptotic Methods for Asset Market Equilibrium Analysis," NBER Working Papers 8135, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Lombardo, Giovanni & Sutherland, Alan, 2007. "Computing second-order-accurate solutions for rational expectation models using linear solution methods," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 515-530, February. [Downloadable!] (restricted)
    Other versions:
  5. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics. [Downloadable!]
  7. Michael B. Devereux & Alan Sutherland, 2007. "Country Portfolio Dynamics," IMF Working Papers 07/283, International Monetary Fund. [Downloadable!]
    Other versions:
  8. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 743-764, October. [Downloadable!] (restricted)
  9. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "International Financial Adjustment," CEPR Discussion Papers 4923, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2007. "The Valuation Channel of External Adjustment," NBER Working Papers 12937, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July. [Downloadable!] (restricted)
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  12. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Charles Engel & Akito Matsumoto, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund. [Downloadable!]
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  14. Corsetti, Giancarlo & Pesenti, Paolo, 2005. "International dimensions of optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 281-305, March. [Downloadable!] (restricted)
    Other versions:
  15. Martin D. D. Evans & Viktoria Hnatkovska, 2005. "International Capital Flows, Returns and World Financial Integration," NBER Working Papers 11701, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Cedric Tille & Eric van Wincoop, 2007. "International Capital Flows," Working Papers 122007, Hong Kong Institute for Monetary Research. [Downloadable!]
    Other versions:
  17. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," CEG Working Papers 20012, Trinity College Dublin, Department of Economics. [Downloadable!]
    Other versions:
  18. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2005. "Country Portfolios," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 914-945, 06. [Downloadable!] (restricted)
    Other versions:
  19. 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, issue Jan. [Downloadable!]
  20. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October. [Downloadable!] (restricted)
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  21. Samuelson, Paul A, 1970. "The Fundamental Approximation Theorem of Portfolio Analysis in terms of Means, Variances, and Higher Moments," Review of Economic Studies, Blackwell Publishing, vol. 37(4), pages 537-42, October. [Downloadable!] (restricted)
  22. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," Working Papers 112006, Hong Kong Institute for Monetary Research. [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fabrizio Perri & Jonathan Heathcote, 2007. "The International Diversification Puzzle Is Not as Bad as You Think," Working Papers 2007-3, University of Minnesota, Department of Economics, revised 08 Oct 2007. [Downloadable!]
    Other versions:
  2. Gian Maria Milesi-Ferretti & Philip R. Lane, 2008. "Where Did All the Borrowing Go? A Forensic Analysis of the U.S. External Position," IMF Working Papers 08/28, International Monetary Fund. [Downloadable!]
    Other versions:
  3. Nicolas Coeurdacier & Pierre-Olivier Gourinchas, 2008. "When bonds matter: home bias in goods and assets," Working Paper Series 2008-25, Federal Reserve Bank of San Francisco. [Downloadable!]
  4. Devereux, Michael B & Sutherland, Alan, 2007. "Country Portfolio Dynamics," CEPR Discussion Papers 6208, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Lane, Philip R. & Shambaugh, Jay C, 2007. "Financial Exchange Rates and International Currency Exposures," CEPR Discussion Papers 6473, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Stefan Ried, 2009. "Putting Up a Good Fight: The Galí-Monacelli Model versus “The Six Major Puzzles in International Macroeconomics”," SFB 649 Discussion Papers SFB649DP2009-020, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  7. Charles Engel & Akito Matsumoto, 2009. "The International Diversification Puzzle when Goods Prices are Sticky: It's Really about Exchange-Rate Hedging, not Equity Portfolios," IMF Working Papers 09/12, International Monetary Fund. [Downloadable!]
    Other versions:
  8. Coeurdacier, Nicolas & Kollmann, Robert Miguel W. K. & Martin, Philippe J., 2008. "International portfolios, capital accumulation and foreign assets dynamics," Discussion Paper Series 1: Economic Studies 2008,19, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  9. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2007. "International Portfolios with Supply, Demand and Redistributive Shocks," CEPR Discussion Papers 6482, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. Silvio Contessi & Pierangelo DePace & Johanna Francis, 2008. "The cyclical properties of disaggregated capital flows," Working Papers 2008-041, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  11. Cédric Tille & Eric van Wincoop, 2007. "International capital flows," Staff Reports 280, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  12. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2007. "The Valuation Channel of External Adjustment," NBER Working Papers 12937, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Devereux, Michael B. & Sutherland, Alan, 2008. "Financial globalization and monetary policy," Discussion Paper Series 1: Economic Studies 2008,20, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  14. Günter Coenen & Giovanni Lombardo & Frank Smets & Roland Straub, 2008. "International transmission and monetary policy cooperation," Working Paper Series 858, European Central Bank. [Downloadable!]
    Other versions:
  15. Michael B Devereux & Alan Sutherland, 2007. " Country Portfolio Dynamics," CDMA Conference Paper Series 0706, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  16. Silvio Contessi & Pierangelo DePace, 2008. "Do European capital flows comove?," Working Papers 2008-042, Federal Reserve Bank of St. Louis. [Downloadable!]
  17. David Amdur, . "International Diversification in Debt vs Equity," Working Papers gueconwpa~09-09-01, Georgetown University, Department of Economics. [Downloadable!]
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