Solving for Country Portfolios in Open Economy Macro Models

By Michael B. Devereux, Alan Sutherland. Social Science Research Network, 2007

150 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/42608172410b1a8f118131ebda74a13d4d376aa8

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Citations in the corpus

Valuation Effects and the Dynamics of Net External Assets (2009, unknown): “Also note that in Devereux and Sutherland (2007, 2008) r̂x,t denotes r̂1t− r̂2t where r̂1t and r̂2t are the log deviations of r1 and r2 from their values in the non-stochastic steady state.”
DSGE Models and Central Banks (2009, unknown): “…and Matsumoto (2005) have modelled the portfolio choice problem in a standard DSGE model with sticky-prices and complete markets, and more recently, Devereux and Sutherland (2006), proposed a solution method to embed the portfolio choice problem in a modern macroeconomic model with multiple assets…”
Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy? (2011, background): “…balance sheets in the banking sector (Choi and Cook, 2004), portfolio choice issue with complete (Engel or Matsumoto, 2009) or incomplete markets (Devereux and Sutherland, 2007) or collateral constraints (Iacovello and Neri, 2010).2 A few studies focus more specifically on the relationship…”
Financial Exchange Rates and International Currency Exposures (2010, background): “An exchange rate index based on weights from equation (8) is conceptually di¤erent from a trade-weighted index because it has currencies entering both positively and negatively.”
A method for solving general equilibrium models with incomplete markets and many financial assets (2012, unknown): “Cn t = ˆ Y n t = ˆ Dn t . ( 15 ) Since the equity liabilities of all firms are normalized to unity, the market clearing conditions in the h and”
Home bias in open economy financial macroeconomics (2013, unknown): “The main advantage of the perturbation methods developed by Devereux and Sutherland (2008a) and Tille and van Wincoop (2008) are: (1) they are very easy to implement as they are close to standard approximation methods used in DSGE models; (2) they can be applied to broad range of environments…”
Financial Globalization and Monetary Policy (2007, methodology): “Then, combining (18) and (19) with (16), and substituting for 1tξ + using ) , 11 x tt rξ α ′ ++ = ) , it is shown in Devereux and Sutherland (2006a) that the solution for ) α may be written as 12The wealth dynamics of the model have a unit root for the same reason as in many open economy models.”