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Solving for Country Portfolios in Open Economy Macro Models

  • Michael B. Devereux

    (Centre for Economic Policy Research, University of British Columbia, Hong Kong Institute for Monetary Research)

  • Alan Sutherland

    (Centre for Economic Policy Research, University of St Andrews)

Open economy macroeconomics typically abstracts from portfolio structure. But the recent experience of financial globalisation makes it important to understand the determinants and composition of gross country portfolios. This paper presents a simple approximation method for computing equilibrium financial portfolios in stochastic open economy macro models. The method is widely applicable, easy to implement, and delivers analytical solutions for optimal gross portfolio positions in any combination of types of asset. It can be used in models with any number of assets, whether markets are complete or incomplete, and can be applied to stochastic dynamic general equilibrium models of any dimension, so long as the model is amenable to a solution using standard approximation methods.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 162007.

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Length: 28 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:hkm:wpaper:162007
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  12. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," The Institute for International Integration Studies Discussion Paper Series iiisdp124, IIIS.
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  17. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers 3096, C.E.P.R. Discussion Papers.
  18. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
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