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International portfolio diversification and labor/leisure choice

  • Urban J. Jermann

When marginal utility of consumption depends on leisure, investors will take this into account when allocating their wealth among different assets. This paper presents a multi-country general equilibrium model driven by productivity shocks, where labor-leisure and consumption are chosen endogenously. We use this framework to study the effect of leisure for optimal international diversification. We find that in the symmetric case the model's ability to help explain home-bias depends crucially on the level of substitutability between consumption and leisure.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 119.

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Date of creation: 1997
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Handle: RePEc:fip:fedmem:119
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  1. Urban J. Jermann & Marianne Baxter, 1999. "Household Production and the Excess Sensitivity of Consumption to Current Income," American Economic Review, American Economic Association, vol. 89(4), pages 902-920, September.
  2. Baxter, M. & Jermann, U.J., 1993. "The International Diversification Puzzle is Worse than you Think," RCER Working Papers 350, University of Rochester - Center for Economic Research (RCER).
  3. Charles Ka Yui Leung, 1995. "Does non-traded input necessarily deepen the international non-diversification puzzle I?: The one-good case," Economics Letters, Elsevier, vol. 49(3), pages 281-285, September.
  4. John B. Taylor & Harald Uhlig, 1990. "Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods," NBER Working Papers 3117, National Bureau of Economic Research, Inc.
  5. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  6. Marianne Baxter & Urban J. Jermann & Robert G. King, 1995. "Nontraded Goods, Nontraded Factors, and International Non-Diversification," NBER Working Papers 5175, National Bureau of Economic Research, Inc.
  7. Rupert, Peter & Rogerson, Richard & Wright, Randall, 2000. "Homework in labor economics: Household production and intertemporal substitution," Journal of Monetary Economics, Elsevier, vol. 46(3), pages 557-579, December.
  8. King, Robert G & Plosser, Charles I & Rebelo, Sergio T, 2002. "Production, Growth and Business Cycles: Technical Appendix," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 87-116, October.
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