TY  - JOUR
AU  - Pavlova,Anna
AU  - Rigobon,Roberto
TI  - An Asset-Pricing View of External Adjustment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13468
PY  - 2007
Y2  - October 2007
UR  - http://www.nber.org/papers/w13468
L1  - http://www.nber.org/papers/w13468.pdf
N1  - Author contact info:
Anna Pavlova
London Business School
Regents Park
London NW1 4SA
UK
Tel: 617/253-7159
E-Mail: apavlova@london.edu

Roberto Rigobon
MIT Sloan School of Management
100 Main Street, E62-516
Cambridge, MA 02142
Tel: 617/258-8374
Fax: 617/258-6855
E-Mail: rigobon@mit.edu
AB  - 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.
ER  -