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International Portfolios with Supply, Demand and Redistributive Shocks

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Author Info
Nicolas Coeurdacier
Robert Kollmann
Philippe Martin

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Abstract

This paper explains three key stylized facts observed in industrialized countries: 1) portfolio holdings are biased towards local equity; 2) international portfolios are long in foreign currency assets and short in domestic currency; 3) the depreciation of a country's exchange rate is associated with a net external capital gain, i.e. with a positive wealth transfer from the rest of the world. We present a two-country, two-good model with trade in stocks and bonds, and three types of disturbances: shocks to endowments, to the relative demand for home vs. foreign goods, and to the distribution of income between labor and capital. With these shocks, optimal international portfolios are shown to be consistent with the stylized facts.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13424.

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Date of creation: Sep 2007
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Handle: RePEc:nbr:nberwo:13424

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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  1. Philip R. Lane and Jay C. Shambaugh, 2008. "The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets Abstract: Recently, there have been numerous advances in modelling optimal international portfolio allocat," The Institute for International Integration Studies Discussion Paper Series iiisdp253, IIIS. [Downloadable!]
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