EconPapers    
Economics at your fingertips  
 

Resolving International Macro Puzzles with Imperfect Risk Sharing and Global Solution Methods

Jonathan Adams and Philip Barrett ()
Additional contact information
Philip Barrett: International Monetary Fund

No 1003, Working Papers from University of Florida, Department of Economics

Abstract: Do gross international asset positions matter for macroeconomic outcomes? In this paper, we argue that they do. In particular, we demonstrate that asset market incompleteness which features a meaningful portfolio choice can resolve the Backus-Smith puzzle: that relative consumptions and real exchange rates are negatively correlated. Because income and nominal exchange rates are positively correlated, countries choose a portfolio that features home bias in bond holdings, which is common in the data. We compare our findings to the predictions of alternative asset market structures frequently used in the literature - such as complete markets or restricting assets to a single bond - and show that they cannot solve the Backus-Smith puzzle without further frictions. We also show that local perturbation methods that use endogenous discount factors to stabilize the model are inaccurate, even when they correctly characterize the average portfolio holdings. Instead, we use a novel global solution method to accurately solve the portfolio problem when asset markets are incomplete, using an approach that generalizes Maliar and Maliar (2015) to solve a wide class of models.

JEL-codes: F30 F41 (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://users.clas.ufl.edu/adamsjonathan/files/adamsbarrett.pdf First version, 19-05-2017 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ufl:wpaper:001003

Access Statistics for this paper

More papers in Working Papers from University of Florida, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Jonathan Adams ().

 
Page updated 2022-07-08
Handle: RePEc:ufl:wpaper:001003