Washington, DC 20431
Institutional Affiliation: International Monetary Fund
Information about this author at RePEc
NBER Working Papers and Publications
|May 2006||Portfolio Choice in a Monetary Open-Economy DSGE Model|
with Charles Engel: w12214
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 diver...