Portfolio Choice in a Monetary Open-Economy DSGE Model

Akito Matsumoto and Charles Engel

No 2005/165, 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.

Keywords: WP; optimal portfolio (search for similar items in EconPapers)
Pages: 43
Date: 2005-08-01
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Citations: View citations in EconPapers (42)

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Working Paper: Portfolio Choice in a Monetary Open-Economy DSGE Model (2006)
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