Shifts in Portfolio Preferences of International Investors: An Application to Sovereign Wealth Funds

18 Pages Posted: 23 Oct 2013

See all articles by Filipa Sa

Filipa Sa

King's College London; IZA Institute of Labor Economics

Francesca Viani

Banco de España

Multiple version iconThere are 3 versions of this paper

Date Written: November 2013

Abstract

We develop a dynamic general equilibrium model to analyze the macroeconomic effects of a shift in portfolio preferences of foreign investors. The model has two countries and two asset classes (equities and bonds). It is characterized by imperfect substitutability between assets and allows for endogenous adjustment in interest rates and asset prices. To illustrate the mechanics of the model, we calibrate it to analyze a transfer of reserves from central banks to sovereign wealth funds (SWFs). We look separately at two diversification paths: a shift away from dollar assets (path 1), and a shift away from US bonds to US equities (path 2). In path 1, the dollar depreciates and US net debt falls on impact and increases in the long run. In path 2, the dollar depreciates and US net debt increases in the long run.

Suggested Citation

Sa, Filipa G. and Viani, Francesca, Shifts in Portfolio Preferences of International Investors: An Application to Sovereign Wealth Funds (November 2013). Review of International Economics, Vol. 21, Issue 5, pp. 868-885, 2013. Available at SSRN: https://ssrn.com/abstract=2344022 or http://dx.doi.org/10.1111/roie.12076

Filipa G. Sa (Contact Author)

King's College London ( email )

150 Stamford Street
London, SE1 9NN
United Kingdom

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Francesca Viani

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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