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International Currency Portfolios

  • Michael Kumhof

    (International Monetary Fund)

The paper develops a theory that endogenizes the currency composition of international nominal bond portfolios in general equilibrium. It emphasizes the critical roles of government debt and of government policies, and thereby reconnects to the partial equilibrium portfolio balance literature of the 1980s. Consistent with recent empirical findings, optimal private sector foreign currency positions are found to be small and possibly negative, with their size decreasing in exchange rate volatility. Optimal private sector domestic currency positions are large and increasing in domestic interest rates. Uncovered interest parity is replaced by a relationship that also depends on outstanding bond stocks.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 84.

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Date of creation: 2010
Date of revision:
Handle: RePEc:red:sed010:84
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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