Working Paper: CEPR ID: DP5966
Authors: Michael B. Devereux; Alan Sutherland
Abstract: Open economy macroeconomics typically abstracts from portfolio structure. But the recent experience of financial globalization 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 assets. 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.
Keywords: country profiles; solution methods
JEL Codes: E52; E58; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in nominal exchange rates (F31) | capital gains and losses (H24) |
| changes in equity prices (G12) | capital gains and losses (H24) |
| capital gains and losses (H24) | value of net foreign assets (F21) |
| structure of international financial linkages (F30) | complexity of gross asset and liability positions (G32) |
| portfolio allocation (G11) | macroeconomic outcomes (E66) |
| macroeconomic outcomes (E66) | portfolio allocation (G11) |
| approximation technique (C60) | resulting asset allocations (G11) |