An Asset-pricing View of External Adjustment
Author | : Anna Pavlova |
Publisher | : |
Total Pages | : 60 |
Release | : 2007 |
ISBN-10 | : PSU:000062566711 |
ISBN-13 | : |
Rating | : 4/5 (11 Downloads) |
Download or read book An Asset-pricing View of External Adjustment written by Anna Pavlova and published by . This book was released on 2007 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.