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International equity and bond positions in a DSGE model with variety risk in consumption

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  • Hamano Masashige

    ()
    (University of Luxembourg CREA)

Abstract

This paper analyzes equity and bond positions in a two-country DSGE model where the number of varieties, i.e. extensive margin is endogenously determined. Households take care about not only the price of goods but also the variety of goods they consume. The welfare-based real exchange rate fluctuations matter in inter- national consumption risk sharing. We investigate analytically and numerically the implication of "variety risk" induced by fluctuations in extensive margins. In nu- merical computation of zero-order steady state portfolios, we employ the Devereux and Sutherland method. We show that, with variety risk, home biased equity posi- tions are further amplified compared to those obtained with the standard model in the literature. The result is shown to be robust with or without firm heterogeneity in marginal costs of production.

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File URL: http://wwwfr.uni.lu/content/download/52328/627367/file/2012-05%20-%20International%20equity%20and%20bond%20positions%20in%20a%20DSGE%20model%20with%20variety%20risk%20in%20consumption.pdf
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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 12-05.

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Date of creation: 2012
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Handle: RePEc:luc:wpaper:12-05

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Keywords: real exchange rate; home biased equity puzzle; firm entry; firm heterogeneity;

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References

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Citations

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Cited by:
  1. Masashige Hamano, 2013. "The consumption-real exchange rate anomaly with extensive margins," CREA Discussion Paper Series 13-01, Center for Research in Economic Analysis, University of Luxembourg.
  2. Matteo Cacciatore & Giuseppe Fiori & Fabio Ghironi, 2013. "Market Deregulation and Optimal Monetary Policy in a Monetary Union," NBER Working Papers 19025, National Bureau of Economic Research, Inc.
  3. Masashige Hamano & Pierre M. Picard, 2013. "Extensive and intensive margins and the choice of exchange rate regimes," CREA Discussion Paper Series 13-18, Center for Research in Economic Analysis, University of Luxembourg.

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