NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

An Asset-Pricing View of External Adjustment

Anna Pavlova, Roberto Rigobon

NBER Working Paper No. 13468
Issued in October 2007
NBER Program(s):   IFM

Recent evidence on the importance of cross-border equity flows calls for a rethinking of the standard theory of external adjustment. We introduce equity holdings and portfolio choice into an otherwise conventional open-economy dynamic equilibrium model. Our model is simple and admits a closed-form solution regardless of whether financial markets are complete or incomplete. We find that the excessive emphasis put in the literature on solving models with incomplete markets for the sole purpose of obtaining nontrivial implications for the current account is misplaced. We revisit the current debate on the relative importance of the standard vs. the capital-gains-based (or "valuation'') channels of the external adjustment and establish that in our framework they are congruent. Our model's implications are consistent with a number of intriguing stylized facts documented in the recent empirical literature.

download in pdf format
   (1218 K)

email paper

This paper is available as PDF (1218 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13468

Published: Pavlova, Anna & Rigobon, Roberto, 2010. "An asset-pricing view of external adjustment," Journal of International Economics, Elsevier, vol. 80(1), pages 144-156, January. citation courtesy of

Users who downloaded this paper also downloaded these:
Pavlova and Rigobon w9834 Asset Prices and Exchange Rates
Pavlova and Rigobon w11440 Wealth Transfers, Contagion, and Portfolio Constraints
Pavlova and Rigobon w16630 International Macro-Finance
Devereux and Sutherland w14794 Valuation Effects and the Dynamics of Net External Assets
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us