TY  - JOUR
AU  - Engel,Charles
AU  - Matsumoto,Akito
TI  - Portfolio Choice in a Monetary Open-Economy DSGE Model
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12214
PY  - 2006
Y2  - May 2006
UR  - http://www.nber.org/papers/w12214
L1  - http://www.nber.org/papers/w12214.pdf
N1  - Author contact info:
Charles Engel
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI  53706-1393
Tel: 608/262-3697
Fax: 608/262-2033
E-Mail: cengel@ssc.wisc.edu

Akito Matsumoto
Research Dept.
IMF
Washington, DC 20431
E-Mail: amatsumoto@imf.org
AB  - This paper develops a two-country monetary DSGE model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some goods prices are set without full information of the state. We show that temporarily sticky nominal goods prices can have large effects on equity portfolios. Home and foreign portfolios are not identical in equilibrium. In response to technology shocks, sticky prices generate a negative correlation between labor income and the profits of domestic firms, biasing portfolios in favor of home equities. In contrast, under flexible prices, labor income and the profits of the domestic firms are positively correlated. Even a small amount of nominal price stickiness can generate these portfolio differences, depending on the diversification role played by the terms of trade. Returns on human capital and equities may be positively correlated under sticky prices when the source of shocks is monetary, but this risk is hedged through nominal assets rather than through equities.
ER  -