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A New Open Economy Macroeconomic Model with Endogenous Portfolio Diversifi cation and Firms Entry

Marta Arespa Castello

No XREAP2011-15, Working Papers from Xarxa de Referència en Economia Aplicada (XREAP)

Abstract: This paper provides a new benchmark for the analysis of the international diversi cation puzzle in a tractable new open economy macroeconomic model. Building on Cole and Obstfeld (1991) and Heathcote and Perri (2009), this model speci es an equilibrium model of perfect risk sharing in incomplete markets, with endogenous portfolios and number of varieties. Equity home bias may not be a puzzle but a perfectly optimal allocation for hedging risk. In contrast to previous work, the model shows that: (i) optimal international portfolio diversi cation is driven by home bias in capital goods, independently of home bias in consumption, and by the share of income accruing to labour. The model explains reasonably well the recent patterns of portfolio allocations in developed economies; and (ii) optimal portfolio shares are independent of market dynamics.

Keywords: Subsidies; Home bias, equity puzzle, New open economy macroeconomics, NOEM, extensive margin. (search for similar items in EconPapers)
JEL-codes: F41 G11 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2011-10, Revised 2011-10
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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http://www.xreap.cat/RePEc/xrp/pdf/XREAP2011-15.pdf First version, 2011 (application/pdf)
http://www.xreap.cat/RePEc/xrp/pdf/XREAP2011-15.pdf Revised version, 2011 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:xrp:wpaper:xreap2011-15

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