Country Portfolios in Open Economy Macro Models - Dallas Fed

This paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models. The method is widely applicable, simple to implement, and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset. It can be used in models with any number of assets, whether markets are complete or incomplete, and can be applied to stochastic dynamic general equilibrium models of any dimension, so long as the model is amenable to a solution using standard approximation methods. We first illustrate the approach using a simple two-asset endowment economy model, and then show how the results extend to the case of any number of assets and general economic structure. JEL codes: E52, E58, F41 * Michael B. Devereux, Department of Economics, University of British Columbia, 997-1873 East Mall, Vancouver, B.C. Canada V6T 1Z1. [email protected]. Alan Sutherland, School of Economics and Finance, University of St Andrews, St Andrews, Fife, KY16 9AL, UK. [email protected]. We are grateful to Philip Lane, Klaus Adam, Pierpaolo Benigno, Gianluca Benigno, Berthold Herrendorf, Fabrizio Perri, Robert Kollmann, Giancarlo Corsetti, Morten Ravn, Martin Evans and Viktoria Hnatkovska for comments on an earlier draft of this paper. This research is supported by the ESRC World Economy and Finance Programme, award number 156-25-0027. Devereux also thanks SSHRC, the Bank of Canada, and the Royal Bank of Canada for financial support. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.