Portfolio and welfare consequences of debt market dominance

Serhiy Stepanchuk and Viktor Tsyrennikov

Journal of Monetary Economics, 2015, vol. 74, issue C, 89-101

Abstract: The ability to issue debt that pays in units of the domestic good leads a country to accumulate a large and negative net foreign asset position while maintaining a positive position in equity. This debt market advantage also helps to explain the weak relationship between the real exchange rate and relative consumption. Our stylized model matches the key facts about the U.S. international portfolio, the U.S. real exchange rate, and explains nearly 50% of the observed variation in the valuation effects. We find that taxing bond market transactions increases the volatility of the exchange rate, capital flows and allocations. In contrast, taxing equity positions stabilizes the exchange rate and capital flows while having little impact on the allocation. Lastly, the paper describes a global solution method for portfolio problems under incomplete markets.

Keywords: International portfolio choice; Global imbalances; Incomplete markets; Bond market (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:74:y:2015:i:c:p:89-101

DOI: 10.1016/j.jmoneco.2015.06.005

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