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Country Portfolio Dynamics

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  • Alan Sutherland
  • Michael B. Devereux

Abstract

This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. the method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/283.

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Length: 27
Date of creation: 01 Dec 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/283

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Keywords: Bonds; International bond markets; equations; equation; bond; general equilibrium models; random variable; general equilibrium model; foreign bonds; covariance; functional form; international capital; state bond; financial markets; nominal bonds; returns on bonds; international financial markets; perturbation; nominal exchange rate; financial globalization; stochastic models; foreign bond; constant term; bond markets; functional forms; asset markets; international bond; hedge;

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References

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  1. Jinill Kim & Sunghyun Kim & Ernst Schaumburg & Christopher A. Sims, 2003. "Calculating and Using Second Order Accurate Solutions of Discrete Time," Levine's Bibliography 666156000000000284, UCLA Department of Economics.
  2. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," Working Papers 112006, Hong Kong Institute for Monetary Research.
  3. Cedric Tille, 2005. "Financial integration and the wealth effect of exchange rate fluctuations," Staff Reports 226, Federal Reserve Bank of New York.
  4. Charles Engel & Akito Matsumoto, 2006. "Portfolio Choice in a Monetary Open-Economy DSGE Model," NBER Working Papers 12214, National Bureau of Economic Research, Inc.
  5. Christopher A. Sims & Jinill Kim & Sunghyun Kim, 2003. "Calculating and Using Second Order Accurate Solution of Discrete Time Dynamic Equilibrium Models," Computing in Economics and Finance 2003 162, Society for Computational Economics.
  6. 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.
  7. 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.
  8. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International financial adjustment," Proceedings, Federal Reserve Bank of San Francisco.
  9. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, vol. 80(2), pages 157-175, March.
  10. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2005. "A Global Perspectiveon External Positions," IMF Working Papers 05/161, International Monetary Fund.
  11. Akito Matsumoto & Charles Engel, 2009. "The International Diversification Puzzle when Goods Prices Are Sticky," IMF Working Papers 09/12, International Monetary Fund.
  12. repec:tcd:wpaper:tep16 is not listed on IDEAS
  13. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2007. "The Valuation Channel of External Adjustment," NBER Working Papers 12937, National Bureau of Economic Research, Inc.
  14. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  15. Michael B. Devereux & Alan Sutherland, 2009. "Valuation Effects and the Dynamics of Net External Assets," NBER Working Papers 14794, National Bureau of Economic Research, Inc.
  16. Schmitt-Grohé, Stephanie & Uribe, Martín, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," CEPR Discussion Papers 2963, C.E.P.R. Discussion Papers.
  17. Martin D D Evans & Viktoria Hnatkovska, 2006. "International Capital Flows Returns and World Financial Integration," 2006 Meeting Papers 60, Society for Economic Dynamics.
  18. Devereux, Michael B & Sutherland, Alan, 2006. "Solving for Country Portfolios in Open Economy Macro Models," CEPR Discussion Papers 5966, C.E.P.R. Discussion Papers.
  19. Charles Engel & Akito Matsumoto, 2009. "The International Diversification Puzzle When Goods Prices Are Sticky: It's Really about Exchange-Rate Hedging, Not Equity Portfolios," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 155-88, July.
  20. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
  21. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  22. Kenneth L. Judd & Sy-Ming Guu, 2001. "Asymptotic Methods for Asset Market Equilibrium Analysis," NBER Working Papers 8135, National Bureau of Economic Research, Inc.
  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. 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).
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