Portfolio Choice in a Monetary Open-Economy DSGE Model

Charles Engel () and Akito Matsumoto

No 05/165, IMF Working Papers from International Monetary Fund

Abstract: 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.

New Economics Papers: this item is included in nep-cba, nep-dge, nep-fin and nep-mac
Date: 2005-08-25
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Working Paper: Portfolio Choice in a Monetary Open-Economy DSGE Model (2006)
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