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International Portfolio Equilibrium and the Current Account

35 Pages Posted: 8 Mar 2006  

Robert Kollmann

ECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 20, 2006

Abstract

This paper analyzes the determinants of international asset portfolios, using a neoclassical dynamic general equilibrium model with home bias in consumption. For plausible parameter values, the model explains the fact that typical investors hold most of their wealth in domestic assets (portfolio home bias). In the model, the current account balance (change in net foreign assets)is mainly driven by fluctuations in equity prices; the current account is predicted to be highly volatile and to exhibit low serial correlation; changes in a country's foreign equity assets and liabilities are predicted to be highly positively correlated. The paper constructs current account series that include external capital gains/losses, for 17 OECD economies. The behavior of the empirical series confirms the theoretical predictions.

Keywords: International portfolio holdings, Dynamic General Equilibrium, Current Account, Consumption and portfolio home bias

JEL Classification: G1, F2, F3

Suggested Citation

Kollmann, Robert, International Portfolio Equilibrium and the Current Account (February 20, 2006). Available at SSRN: https://ssrn.com/abstract=889084 or http://dx.doi.org/10.2139/ssrn.889084

Robert Kollmann (Contact Author)

ECARES, Université Libre de Bruxelles ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

University of Paris XII - Department of Economics ( email )

61 avenue du General de Gaulle
Creteil cedex, 94010
France

HOME PAGE: http://www.robertkollmann.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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