the home bias of the poor foreign asset portfolios across the wealth distribution abstract this paper documents how the share of foreign stocks in us household portfolios rises with the ratio of financial wealth to non financial income this is both because wealthier households are more likely to participate in foreign asset markets and because portfolio shares of participants increase with financial wealth but decrease with non financial income a simple standard two country general equilibrium model shows that hedging of terms of trade movements and non financial income risk produces non trivial heterogeneity in portfolios across the wealth and income distribution within countries that is qualitatively in line with this evidence

the international transmission of real business cycles the authors present a stochastic model of two barter economies with production linked by free trade in goods and securities which generates pareto efficient international transmissions of business cycle disturbances each country is inhabi ted by an infinitely lived representative firm and consumer worker and is subject to country specific production shocks the internation al capital market effects perfect pooling of country specific risk c onsumption and output volatility may be higher in trade than under au tarchy as agents can be induced to undertake additional risk in exchange for a higher expected utility copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

how hyperbolic discounting preference affects chinese consumers consumption choice between conventional and electric vehicles abstract this paper presents a theoretical model and addresses several issues related to life cycle cost analysis to illustrate how time inconsistent preferences affect consumer choice the particular case study selects involved consumer choice between a vehicle with high initial acquisition cost but low ownership cost e g an electric vehicle ev and one with a low initial acquisition cost but high ownership cost e g a conventional internal combustion engine vehicle icev to test our theoretical analysis we conduct an empirical study on how time discounting rates affect consumer choice between icevs and evs with different initial cost ratios from the survey results we find that individuals with higher present bias showed irrational purchase behavior even when controlling for wealth level specifically people making some stronger bias to present decisions chose higher total cost icevs with lower initial cost but higher ownership cost over lower total cost evs with higher initial cost and lower ownership cost however people s long term discount is not correlated with irrational vehicle purchase behavior furthermore we study the present bias and long term discount rate in one scenario and found present bias to be correlated with irrational behavior

analytical approximations in models of hysteresis decisions made under ongoing uncertainty and costly reversibility entail a range of the state variable where inaction is optimal which in turn produces hysteresis permanent effects of temporary shifts the range is usually defined by non linear equations that need numerical solutions in this paper a technique of analytical approximations is developed and applied to two models menu costs and investment the resulting explicit solutions help clarify why hysteresis is important even for small irreversibility in the menu cost model hysteresis is two orders of magnitude larger than under the akerlof yellen or mankiw assumptions when decisions that are costly to reverse are made under conditions of ongoing uncertainty the optimum policy usually entails a range of inertia the action should be taken only when the value of the underlying state variable becomes especially favourable and reversed only when it becomes especially unfavourable there is an intermediate range over which inaction is optimal this in turn gives rise to hysteresis starting from a value in the range of inertia if the state variable crosses the action trigger point and then returns to its original level the action will be taken but not reversed thus a temporary change will leave a permanent effect numerical solutions for models of irreversible investment show that the range of inaction is remarkably large even when the cost of reversal is small see brennan and schwartz 1985 constantinides 1986 and dixit 1989a b for examples of this unfortunately the equations tlhat determine the optimum policy are highly non linear they do not have analytical solutions therefore we lack a clearer and more general understanding of why hysteresis is numerically so important in this paper i derive analytical approximations for the solutions of more general problems of this kind when the costs of change are small the idea that small costs of change induce large amounts of inertia has been popularized in the model of akerlof and yellen 1985 mankiw 1985 and others in these models second order small costs of making price changes yield price stickiness in response to first order changes in the money supply this is a simple application of the envelope theorem but these models are static and their application to a dynamic reality must assume either permanent shocks or static expectations when there is ongoing uncertainty which is rationally expected by the decision maker the option value of the status quo enlarges the zone where inaction is optimal adding these features to the mankiw akerlof yellen may model i show that fourth order small costs of change generate first order inertia

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

international capital mobility net versus gross stocks and flows abstract feldstein and horioka 1980 observed that net capital flows have been small in relation to domestic saving and investment flows for oecd countries in the post war period which they interpreted as evidence of low capital mobility this paper argues that the correlation between gross domestic and international financial flows can be a better indicator of capital mobilitythan net capital flows contrary to the conventional wisdom among international economists gross flows have been small in relation to gross domestic asset creation for oecd countries although by this measure the degree of capital mobility increased in the 1980s

international portfolio nondiversification and exchange rate variability abstract incomplete international portfolio diversification is implied by an equilibrium models of exchange rates with nontraded goods the model can also explain the greater correlation between consumption and income within a country than between consumption across countries nontraded goods make more stringent the elasticity conditions required to explain exchange rate variability resulting from current productivity disturbances though not from disturbances to fiscal policies or the prospective return to investment the model is also consistent with international real interest rate differentials changes over time in the current account and relative wealth across nations and observed time series properties of exchange rates

the choice of techniques and the optimality of market equilibrium with rational expectations this paper shows that in the absence of a complete set of risk markets prices provide incorrect signals for guiding production decisions even if all individuals have rational expectations concerning the distribution of prices which will prevail on the market next period the market allocation is in general not a constrained pareto optimum essentially the only conditions under which for all technologies the market equilibrium is a constrained pareto optimum are those in which risk markets are redundant we derive the necessary and sufficient conditions for redundancy of risk markets which turn out to be extremely restrictive

a real model of the world business cycle abstract in this paper a stochastic two country log linear infinite horizon model is used to analyze the generation and transmission of economic fluctuations across countries it is argued that following a country specific supply disturbance production interdependence and unitary elasticities in consumption and production are sufficient to generate comovements in aggregate economic activity investment and trade that are persistent over time and positively correlated across countries however the empirical analysis carried out for the usa japan germany and uk for the 1960 82 period suggests that common shocks rather than trade links are responsible for this pattern of comovements

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

dynamic asset allocation with relative wealth concerns in incomplete markets abstract in dynamic portfolio choice problems stochastic state variables such as stochastic volatility lead to adjustments of the optimal stock demand referred to as hedge terms or merton breeden terms by deriving an explicit solution in a two agent framework with a stochastic opportunity set we show that relative wealth concerns give rise to new hedge terms beyond the ordinary ones this is because the agents hedge against both exogenous changes in the state variable and endogenous decisions of the other agent depending on the parametrization of the model these new terms can significantly change the investors hedging demands we also show that both heterogeneity in risk aversion or relative wealth concerns can have similar effects on the heterogeneity in portfolio decisions formally we study a non cooperative non zero sum stochastic differential game for which we prove a verification theorem in a setting with an unspanned state variable

the inefficiency of the stock market equilibrium this paper establishes that when there is not a complete set of markets but more than one commodity the stock market equilibrium will not in general be a constrained pareto optimum the economy will lack both the property of exchange and production efficiency necessary conditions which must be satisfied if the economy is to be a constrained pareto optimum for all technologies are derived if all individuals have identical homothetic indifference maps then either there must be unitary price elasticities so there is no effective risk or all individuals must have the same degree of risk aversion so there is no trade on the stock market

value added trade and business cycle synchronization ever since frankel and rose s 1998 seminal paper the literature on trade and business cycle synchronization has relied on gross trade data with weak results in recent papers that carefully address omitted variable bias this paper re examines this relationship using new value added trade data for 63 advanced and emerging economies during 1995 2013 in a panel framework we identify a significantly positive impact of bilateral value added trade intensity on business cycle synchronization controlling for global common shocks country pair heterogeneity and other covariates that is absent when gross trade data are used there is also some evidence that the impact of value added trade on synchronization increases with the degree of value added intra industry trade we provide a theoretical rationale for the role of value added trade for synchronization using a simple international business cycle model that features cross country input linkages in production

forum shopping for ex post gas balancing services the patchwork of different imbalance settlement rules in geographically adjacent gas regions induces shippers to go forum shopping to minimize costs of ex post balancing services this shopping increases efficiency and thus welfare of the shippers on the one hand the impact on net efficiency is dependent on the relative incentives provided by different balancing mechanisms and the relative system balancing costs that the transmission system operators face to offer balancing services to unbalanced shippers on the other hand if the gas balancing mechanism and the system balancing costs are aligned net efficiency in the combined gas system will rise our results demonstrate that such an outcome is not guaranteed hence market integration without properly checking compatibility of balancing rules can improve shipper efficiency at the cost of reducing overall efficiency the latter outcome should clearly be avoided by policy makers and european regulators whose primary concern should be overall efficiency as this provides fair and efficient prices for gas consumers and a higher utility for society

savings investment and international capital flows abstract the high correlation between national savings and domestic investment rateshas been interpreted as evidence that capital is not internationally mobile this paper surveys the theory and evidence on the relationship between savings and investment in a sample of 23 oecd countries a positive correlation between savings and investment rates is found in both the short and long runs however a wide variety of models generate such co movements in savings and investment in response to exogenous disturbances even under conditions of complete financial markets thus the savings investment correlation provides little evidence on the question of international capital mobility

the sensitivity of tests of the intertemporal allocation of consumption to near rational alternatives suppose a consumer sets consumption equal to income each period rather than following the optimal permanent income decision rule how much utility does he lose this paper finds that the answer is typically less than 10 cents 1 per quarter in environments specified by popular tests on aggregate data it includes calculations of the costs of excess sensitivity and excess smoothness to income and interest rate changes and the costs of ignoring information it concludes that the theory does not make predictions for aggregate tests that are robust to small costs such as information or transactions copyright 1989 by american economic association

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

the specific factors continuum model with implications for globalization and income risk abstract this paper embeds the specific factors model in the goods continuum approach of dornbusch et al 1977 1980 and applies it to analyze the effect of globalization on income risk globalization amplifies sector specific income risk induced by idiosyncratic sectoral technology shocks but tends to reduce income risk to both mobile and immobile factors induced by aggregate technology shocks that differ by country aggregate risk bears most heavily on the poorest specific factors

international risk sharing and capital mobility abstract under certain assumptions pareto efficient risk sharing implies that changes in consumption across nations will be perfectly correlated this result leads to an indicator of the welfare loss due to imperfect sharing of consumption risks across nations this indicator is used to evaluate the welfare implications of restrictions on various components of the international capital flow holding constant other components of the flow and domestic investment we find that variability in national consumption growth rates would have been considerably greater if capital flows had been restricted and that welfare would have been reduced significantly

international risk sharing and capital mobility another look in a recent article brennan and solnik 1989 attempt to quantify numerically the welfare benefits of risk sharing by a group of oecd economies the result of their calculation is striking in their words p 371 the estimated welfare loss due to impairment of efficient risk sharing if capital flows were eliminated is of the order of 448 per cent of the level of consumption prevailing in the early 1970s this note argues that the brennan solnik welfare measure is faulty and leads to a substantial overstatement of the potential welfare benefits of international risk sharing within their sample of countries for standard levels of risk aversion the brennan solnik measure may overstate these benefits by as much as two orders of magnitude this is true even if one accepts as valid the empirical assumptions the authors make in calculating the consumption variability estimates that underlie their welfare conclusions

capital flows investment and exchange rates abstract this paper incorporates international capital flows into a two country monetary general equilibrium model of asset prices with investment and production we calculate theoretical covariances between investment the current account the exchange rate and the terms of trade these covariances depend upon the coefficient of relative risk aversion the magnitude and sign of a country s net international indebtedness other properties of tastes and technologies and the stochastic processes on disturbances to productivity and monetary growth rates international capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets