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International Portfolio Diversification and the Structure of Global Production

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  • Joseph Steinberg

    (University of Toronto)

Abstract

In recent decades, country portfolio home bias has fallen in advanced economies but not in emerging economies. I use a dynamic general equilibrium model to show that changes in the distribution of global production and absorption explain this pattern. For advanced economies, whose share of world output fell as their trade openness rose, the model predicts an unambiguous drop in home bias. By contrast, emerging economies' growth in both size and trade openness have opposing implications for portfolios. To quantify these forces I calibrate the model to real and counterfactual input-output tables. Jointly, changes in the global production structure account for much of the decline in home bias in advanced economies and lack thereof in emerging economies. Country size and trade openness account for most of this effect. Consistent with theory, the increase in the intermediate share of trade had little impact. (Copyright: Elsevier)

Suggested Citation

  • Joseph Steinberg, 2018. "International Portfolio Diversification and the Structure of Global Production," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 195-219, July.
  • Handle: RePEc:red:issued:16-74
    DOI: 10.1016/j.red.2018.01.001
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    References listed on IDEAS

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    1. repec:anr:reveco:v:10:y:2018:p:207-236 is not listed on IDEAS
    2. Robert C. Johnson, 2018. "Measuring Global Value Chains," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 207-236, August.
    3. repec:pal:assmgt:v:20:y:2019:i:4:d:10.1057_s41260-019-00122-8 is not listed on IDEAS
    4. repec:eee:inecon:v:117:y:2019:i:c:p:175-195 is not listed on IDEAS
    5. Aquino, Juan Carlos, 2018. "The Valuation Channel of External Adjustment in Small Open Economies," Working Papers 2018-011, Banco Central de Reserva del Perú.
    6. Steinberg, Joseph B., 2019. "Brexit and the macroeconomic impact of trade policy uncertainty," Journal of International Economics, Elsevier, vol. 117(C), pages 175-195.

    More about this item

    Keywords

    Country portfolios; International portfolio diversification; Production structure;

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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