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Shifts in Potfolio Preferences of International Investors
Reversals in capital infl ows can have severe economic consequences. This paper develops a dynamic general equilibrium model to analyse the effect on interest rates, asset prices, investment, consumption, output, the exchange rate and the current account of a shift in portfolio preferences of foreign investors. The model has two countries and two asset classes (equities and bonds). It is characterised by imperfect substitutability between assets and allows for endogenous adjustment in interest rates and asset prices. Therefore, it accounts for capital gains arising from equity price movements, in addition to valuation effects caused by changes in the exchange rate. To illustrate the mechanic...
Traded and nontraded goods prices, and international risk sharing : an empirical investigation
Accounting for the pervasive evidence of limited international risk sharing is an important hurdle for open-economy models, especially when these are adopted in the analysis of policy trade-offs likely to be affected by imperfections in financial markets. Key to the literature is the evidence, at odds with efficiency, that consumption is relatively high in countries where its international relative price (the real exchange rate) is also high. We reconsider the relation between cross-country consumption differentials and real exchange rates, by decomposing it into two components, reflecting the prices of tradable and nontradable goods, respectively. We document that, as a common pattern among...
The International Risk-sharing Puzzle is at Business Cycle and Lower Frequency
We decompose the Backus-Smith [1993] statistic -- a low or negative correlation between relative consumption and the real exchange rate at odds with a high degree of international risk sharing -- in its dynamic components at different frequencies. Using multivariate spectral analysis techniques we show that, in most OECD countries, the dynamic correlation tends to be more negative, and significantly so, at business cycle or lower frequencies -- the appropriate frequencies for assessing the performance of international business cycle models. Theoretically, we show that the dynamic correlation predicted by standard open-economy models is the sum of two terms: a term constant across frequencies, which can be negative as a function of uninsurable risk; a term variable across frequencies, which in bond economies is necessarily positive, reflecting the insurance intertemporal trade provides against forecastable contingencies. We show that the main mechanisms proposed in the literature to account for the puzzle are consistent with the evidence.
An Anatomy of the Spanish Current Account Adjustment
This paper aims to identify how much of the recent current account adjustment in Spain can be explained by cyclical factors. For this purpose, we consider the cross-country regressions in the IMF's External Balance Assessment (EBA) methodology but allowing for country-specific slopes and intercepts. The good fit of these regressions implies negligible residuals for most countries, and, as a result, the positive analysis of current account decompositions provides a more informative assessment of the external balance drivers. According to our fi ndings, around 60% of the 12 pp. adjustment of the Spanish external imbalance over the 2008-2015 period can be explained by transitory factors such as the output gap, the oil balance, and the fi nancial cycle. The remaining 40% is explained by factors such as the cyclically-adjusted fiscal consolidation, population aging, lower growth expectations, or competitiveness gains, which can all be considered as more permanent phenomena.
