An Asset-Pricing View of External Adjustment / Anna Pavlova, Roberto Rigobon.

Format:

Book

Author/Creator:

Pavlova, Anna.

Contributor:

National Bureau of Economic Research.

Rigobon, Roberto.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13468.

NBER working paper series no. w13468

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

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:

Print version record

October 2007.