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Solving for Country Portfolios in Open Economy Macro Models

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  • Michael B. Devereux
  • Alan Sutherland

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 07/284.

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Length: 27
Date of creation: 01 Dec 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/284

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Keywords: Payments imbalances; Markets; Trade; Bonds; equations; equation; equilibrium solution; covariance; asset markets; bond; nominal bonds; returns on bonds; international capital; foreign bonds; general equilibrium model; perturbation; hedge; international finance; general equilibrium models; nominal exchange rate; foreign equity; random variable; equation system; financial markets; random variables; financial globalization; international financial markets; hedging; separability; stock market; standard deviation; algebra;

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References

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  1. 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, Federal Reserve Bank of New York, vol. 9(Jan).
  2. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115(4), pages 665-703, 08.
  3. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(4), pages 765-783, October.
  4. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
  5. 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, Elsevier, vol. 31(2), pages 515-530, February.
  6. Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University), 2005. "International Capital Flows, Returns and World Financial Integration," Working Papers, Georgetown University, Department of Economics gueconwpa~05-05-17, Georgetown University, Department of Economics.
  7. Devereux, Michael B & Saito, Makoto, 2006. "A Portfolio Theory of International Capital Flows," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5746, C.E.P.R. Discussion Papers.
  8. 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, Trinity College Dublin, Department of Economics 20014, Trinity College Dublin, Department of Economics.
  9. Cedric Tille, 2005. "Financial Integration and the Wealth Effect of Exchange Rate Fluctuations," 2005 Meeting Papers, Society for Economic Dynamics 282, Society for Economic Dynamics.
  10. Jaewoo Lee & Fabio Ghironi & Alessandro Rebucci, 2009. "The Valuation Channel of External Adjustment," IMF Working Papers 09/275, International Monetary Fund.
  11. Kraay, Aart & Loayza, Norman & Servén, Luis & Ventura, Jaume, 2001. "Country Portfolios," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2974, C.E.P.R. Discussion Papers.
  12. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5512, C.E.P.R. Discussion Papers.
  13. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  14. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
  15. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  16. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports, Federal Reserve Bank of New York 124, Federal Reserve Bank of New York.
  17. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(4), pages 743-764, October.
  18. Cedric Tille & Eric van Wincoop, 2007. "International Capital Flows," Working Papers, Hong Kong Institute for Monetary Research 122007, Hong Kong Institute for Monetary Research.
  19. Charles Engel & Akito Matsumoto, 2006. "Portfolio Choice in a Monetary Open-Economy DSGE Model," NBER Working Papers 12214, National Bureau of Economic Research, Inc.
  20. 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, Wiley Blackwell, vol. 37(4), pages 537-42, October.
  21. Alan Sutherland & Michael B. Devereux, 2007. "Country Portfolio Dynamics," IMF Working Papers 07/283, International Monetary Fund.
  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.
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