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Solving for Country Portfolios in Open Economy Macro Models

Michael Devereux () and Alan Sutherland ()

No 162007, Working Papers from Hong Kong Institute for Monetary Research

Abstract: Open economy macroeconomics typically abstracts from portfolio structure. But the recent experience of financial globalisation 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 asset. 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.

Keywords: Country portfolios; solution methods (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2007
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