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International Portfolio Equilibrium and the Current Account

Robert Kollmann ()

No 5512, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyses the determinants of international asset portfolios, using a neoclassical dynamic general equilibrium model with home bias in consumption. For plausible parameter values, the model explains the fact that typical investors hold most of their wealth in domestic assets (portfolio home bias). In the model, the current account balance (change in net foreign assets) is mainly driven by fluctuations in equity prices; the current account is predicted to be highly volatile and to exhibit low serial correlation; changes in a country's foreign equity assets and liabilities are predicted to be highly positively correlated. The paper constructs current account series that include external capital gains/losses, for 17 OECD economies. The behaviour of those series confirms the theoretical predictions.

Keywords: consumption and portfolio home bias; current account; international portfolio holdings (search for similar items in EconPapers)
JEL-codes: F2 F3 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fin and nep-fmk
Date: 2006-02
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