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Portfolio Choice in a Monetary Open-Economy DSGE Model

Author/Editor: Engel, Charles | Matsumoto, Akito | International Monetary Fund. Research Dept.
Authorized for Distribution: August 1, 2005
Electronic Access: Free Full Text (PDF file size is 481KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: This paper develops a two-country monetary DSGE (dynamic stochastic general equilibrium) model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some goods prices are set without full information of the state. Home and foreign portfolios are not identical in equilibrium. In response to technology shocks, sticky prices generate a negative correlation between labor income and the profits of domestic firms, biasing portfolios in favor of home equities. In contrast, under flexible prices, labor income and the profits of the domestic firms are positively correlated.
 
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Series: Working Paper No. 05/165
Subject(s): Domestic investment | Economic models | Foreign exchange | Foreign investment | Stock markets
Author's keyword(s): Home bias | international portfolio choice
 
English  
    Published:   August 1, 2005        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2005165   Pages:   43
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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