Equilibrium Portfolios and External Adjustment under Incomplete Markets
Recent evidence on the importance of cross-border equity flows calls for a rethinking of the standard theory of external adjustment. We introduce equity holdings and portfolio choice into an otherwise conventional open-economy dynamic equilibrium model. Our model is simple and it admits an exact closed-form solution regardless of whether financial markets are complete or incomplete. We derive a necessary and sufficient condition under which the current account is different from zero and shed light on the relationship between market incompleteness and the current account dynamics. Furthermore, we revisit the current debate on the relative importance of the standard vs. the capital-gains-based (or “valuation”) channels of the external adjustment and establish that in our framework they are congruent. We demonstrate how countries’ portfolio compositions affect the dynamics of their external accounts and argue that a description of the international adjustment mechanism is incomplete if it does not encompass portfolio choice.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:red:sed011:1349. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.