## Portfolio Choice in a Monetary Open-Economy DSGE Model

_IMF Working Papers, August 1, 2005_

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## Bibliographic details
- Authors: Akito Matsumoto, Charles Engel
- Published: August 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451861846.001

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### 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.
- Under flexible prices, labor income and the profits of the domestic firms are positively correlated.

### Model features and assumptions
- Two-country monetary DSGE framework.
- Household portfolio choices include:
  - Home equities.
  - Foreign equities.
  - A forward position in foreign exchange.
- Price setting:
  - Some goods prices are set without full information of the state (sticky-price environment).
  - Comparison with a flexible-price environment is central to the analysis.

### Key findings and mechanisms
- Portfolio composition:
  - Home and foreign portfolios are not identical in equilibrium.
- Effect of technology shocks:
  - With sticky prices: negative correlation between labor income and domestic firm profits → portfolios biased toward home equities.
  - With flexible prices: positive correlation between labor income and domestic firm profits.
- Implication: nominal rigidities (sticky prices) alter the covariance structure between labor income and equity profits, affecting optimal portfolio allocation across home and foreign assets.

### Publication and metadata
- Authors: Akito Matsumoto, Charles Engel
- Date: August 1, 2005
- Series: Working Paper No. 2005/165
- Issue: 165
- Volume: 2005
- Pages: 43
- DOI: https://doi.org/10.5089/9781451861846.001
- Stock No: WPIEA2005165
- ISBN: 9781451861846
- ISSN: 1018-5941
- Subject: Consumption, Income, Labor, Sticky prices, Stocks
- Keywords: optimal portfolio, WP

*IMF Working Paper — Portfolio Choice in a Monetary Open-Economy DSGE Model (Akito Matsumoto; Charles Engel), August 1, 2005.*

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## Content in this bundle

- **Appendix I**
  - [Appendix I (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp05165.pdf.md){rel="alternate" type="text/markdown"}
  - [Appendix I (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp05165.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/portfolio-choice-in-a-monetary-open-economy-dsge-model-18405_