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research article

Portfolio and welfare consequences of debt market dominance

Stepanchuk, Serhiy  
•
Tsyrennikov, Viktor
2015
Journal Of Monetary Economics

The ability to issue debt that pays in units of the domestic good leads a country to accumulate a large and negative net foreign asset position while maintaining a positive position in equity. This debt market advantage also helps to explain the weak relationship between the real exchange rate and relative consumption. Our stylized model matches the key facts about the U.S. international portfolio, the U.S. real exchange rate, and explains nearly 50% of the observed variation in the valuation effects. We find that taxing bond market transactions increases the volatility of the exchange rate, capital flows and allocations. In contrast, taxing equity positions stabilizes the exchange rate and capital flows while having little impact on the allocation. Lastly, the paper describes a global solution method for portfolio problems under incomplete markets. (C) 2015 Elsevier B.V. All rights reserved.

  • Details
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Type
research article
DOI
10.1016/j.jmoneco.2015.06.005
Web of Science ID

WOS:000360515800006

Author(s)
Stepanchuk, Serhiy  
Tsyrennikov, Viktor
Date Issued

2015

Publisher

Elsevier Science Bv

Published in
Journal Of Monetary Economics
Volume

74

Start page

89

End page

101

Subjects

International portfolio choice

•

Global imbalances

•

Incomplete markets

•

Bond market

Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-LL  
Available on Infoscience
September 28, 2015
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/118712
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