International Currency Portfolios

No 84, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: The paper develops a theory that endogenizes the currency composition of international nominal bond portfolios in general equilibrium. It emphasizes the critical roles of government debt and of government policies, and thereby reconnects to the partial equilibrium portfolio balance literature of the 1980s. Consistent with recent empirical findings, optimal private sector foreign currency positions are found to be small and possibly negative, with their size decreasing in exchange rate volatility. Optimal private sector domestic currency positions are large and increasing in domestic interest rates. Uncovered interest parity is replaced by a relationship that also depends on outstanding bond stocks.

Date: 2010
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Working Paper: International Currency Portfolios (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed010:84

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More papers in 2010 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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