asset-pricing view of external adjustment
By: Anna Pavlova, Roberto Rigobon.
Contributors: Rigobón, Roberto.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13468.; Working paper series (National Bureau of Economic Research) -- working paper no. 13468.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 46
Subjects: Economic stabilization -- Econometric models
Description: 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.
Notes: "October 2007"

Includes bibliographical references (p. 41-43).

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