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Artículo de revista

Artículo de revista

Reversals in capital inflows can have severe economic consequences. This paper develops a dynamic general equilibrium model to analyse the effect on interest rates, asset prices, investment, consumption, output, the exchange rate and the current account of a shift in portfolio preferences of foreign investors. The model has two countries and two asset classes (equities and bonds). It is characterised by imperfect substitutability between assets and allows for endogenous adjustment in interest rates and asset prices. Therefore, it accounts for capital gains arising from equity price movements, in addition to valuation effects caused by changes in the exchange rate. To illustrate the mechanics of the model, we calibrate it to analyse the consequences of an increase in the importance of sovereign wealth funds (SWFs). Specifically, we ask what would happen if ‘excess’ reserves held by emerging markets were transferred from central banks to SWFs. We look separately at two diversification paths: one in which SWFs keep the same allocation across bonds and equities as central banks, but move away from dollar assets (path 1); and another in which they choose the same currency composition as central banks, but shift from US bonds to US equities (path 2). In path 1, the dollar depreciates and US net debt falls on impact and increases in the long run. In path 2, the dollar depreciates and US net debt increases in the long run. In both cases, there is a reduction in the ‘exorbitant privilege’, ie, the excess return the United States receives on its assets over what it pays on its liabilities. The model is applicable to other episodes in which foreign investors change the composition of their portfolios.

We decompose the Backus-Smith [1993] statistic --- a low or negative correlation between relative consumption and the real exchange rate at odds with a high degree of international risk sharing --- in its dynamic components at different frequencies. Using multivariate spectral analysis techniques we show that, in most OECD countries, the dynamic correlation tends to be more negative, and significantly so, at business cycle or lower frequencies --- the appropriate frequencies for assessing the performance of international business cycle models. Theoretically, we show that the dynamic correlation predicted by standard open-economy models is the sum of two terms: a term constant across frequencies, which can be negative as a function of uninsurable risk; a term variable across frequencies, which in bond economies is necessarily positive, reflecting the insurance intertemporal trade provides against forecastable contingencies. We show that the main mechanisms proposed in the literature to account for the puzzle are consistent with the evidence.

Whether financial market integration raised global insurance is a crucial, still open issue. All empirical methods to measure cross-border risk-sharing are based on the implicit assumption that international prices do not fluctuate in response to business cycle shocks. This paper shows that these methods can be completely misleading in the presence of large fluctuations in international prices as those observed in the data. I then propose a new empirical method that is immune from this issue. The risk-sharing inefficiency between two countries is measured by the wedge between their Stochastic Discount Factors (SDFs). This measure is a proxy for the welfare losses created by imperfect insurance. Welfare losses can be attributed either to the strength of uninsurable shocks (the extent of risk to be pooled) or to the degree of insurance against different sources of risk. The method is applied to study the evolution of risk-sharing between the US and OECD countries, assuming either constant or time-varying risk-aversion. The degree of insurance is found to have improved over time only for some countries and only if SDFs are estimated assuming time-varying risk-aversion. The results are also informative on the implications of different macro models for international risk. When confronted with the data, standard open-macro models (featuring constant risk-aversion) imply that nominal exchange rate fluctuations do not contain wealth divergences across countries, but rather represent an important source of risk. Time-varying risk-aversion instead implies that limiting welfare losses from imperfect risk-sharing requires reducing the volatility of macro fundamentals.

Defense date: 25/06/2010 Examining Board: Prof. Árpád Ábrahám, EUI Prof. Giancarlo Corsetti, EUI, Supervisor Prof. Charles Engel, University of Wisconsin Prof. Fabrizio Perri, University of Minnesota One of the most relevant events of the last decades has been the fast integration of international financial markets. As most restrictions to cross-border asset trade were removed, the volume of activity in international financial markets increased dramatically, and so did the cross-country flows of resources due to external borrowing and portfolio returns. Many of the macroeconomic consequences of these stronger financial linkages still have to be fully evaluated. This thesis investigates two facets of the strengthening of cross-border financial linkages. First, have developments in international financial markets raised global insurance against national income fluctuations? Second, what would be the macroeconomic effects of changes in the portfolio preferences of big international investors? Chapters 1 to 3 deal with the first issue, the insurance role of international financial markets, both from a theoretical and an empirical perspective. Chapter 4 is focused on the second topic, and is devoted to studying the macroeconomic implications of the growth of large international investors, Sovereign Wealth Funds.