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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)

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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Bibliographic 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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Keywords: Country portfolios; solution methods;

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References

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  1. 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.
  2. 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).
  3. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
  4. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, 08.
  5. Kraay, Aart & Loayza, Norman & Servén, Luis & Ventura, Jaume, 2001. "Country Portfolios," CEPR Discussion Papers 2974, C.E.P.R. Discussion Papers.
  6. Cedric Tille, 2005. "Financial Integration and the Wealth Effect of Exchange Rate Fluctuations," 2005 Meeting Papers 282, Society for Economic Dynamics.
  7. Maurice Obstfeld & Kenneth Rogoff & Ben Bernanke & Kenneth Rogoff, . "The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?," Working Paper 32326, Harvard University OpenScholar.
  8. Martin D D Evans & Viktoria Hnatkovska, 2006. "International Capital Flows Returns and World Financial Integration," 2006 Meeting Papers 60, Society for Economic Dynamics.
  9. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2007. "The Valuation Channel of External Adjustment," NBER Working Papers 12937, National Bureau of Economic Research, Inc.
  10. Eric Van Wincoop & Cedric Tille, 2007. "International Capital Flows," NBER Working Papers 12856, National Bureau of Economic Research, Inc.
  11. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," The Institute for International Integration Studies Discussion Paper Series iiisdp124, IIIS.
  12. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports 124, Federal Reserve Bank of New York.
  13. Maurice Obstfeld & Kenneth Rogoff, 1996. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
  14. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers 3096, C.E.P.R. Discussion Papers.
  15. Kenneth L. Judd & Sy-Ming Guu, 2001. "Asymptotic Methods for Asset Market Equilibrium Analysis," NBER Working Papers 8135, National Bureau of Economic Research, Inc.
  16. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 743-764.
  17. Alan Sutherland & Michael B Devereux, 2007. "Country Portfolio Dynamics," 2007 Meeting Papers 386, Society for Economic Dynamics.
  18. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
  19. Akito Matsumoto & Charles Engel, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund.
  20. Lombardo, Giovanni & Sutherland, Alan, 2005. "Computing second-order-accurate solutions for rational expectation models using linear solution methods," Working Paper Series 0487, European Central Bank.
  21. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  22. 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.
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