IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/2441.html
   My bibliography  Save this paper

Portfolio Diversification, Real Interest Rates, and the Balance of Payments

Author

Listed:
  • Carol L. Osler

Abstract

The paper shows that differences in real interest rates across countries can arise even with perfect competition and fully integrated international capital markets. Specifically, we find that factor returns will differ across countries which are identical except for differences in technological riskiness, overall productivity, or labor force size. We also show that differences across countries in technological riskiness, in risk aversion, in population size and in overall productivity will lead to a non-zero current account in the steady state. Higher technological riskiness, greater risk aversion, and a larger population should be associated with a current account surplus. The analysis is carried out using a two-country Diamond overlapping-generations model in which technological uncertainty is reflected in factor returns.

Suggested Citation

  • Carol L. Osler, 1987. "Portfolio Diversification, Real Interest Rates, and the Balance of Payments," NBER Working Papers 2441, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2441
    Note: ITI IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w2441.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Solnik, Bruno H., 1974. "An equilibrium model of the international capital market," Journal of Economic Theory, Elsevier, vol. 8(4), pages 500-524, August.
    2. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-265, April.
    3. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 769-797, August.
    4. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
    5. Cumby, Robert E. & Mishkin, Frederic S., 1986. "The international linkage of real interest rates: The European-US connection," Journal of International Money and Finance, Elsevier, vol. 5(1), pages 5-23, March.
    6. Baron, David P & Forsythe, Robert, 1979. "Models of the Firm and International Trade under Uncertainty," American Economic Review, American Economic Association, vol. 69(4), pages 565-574, September.
    7. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    8. Elhanan Helpman & Assaf Razin, 1978. "Uncertainty and International Trade in the Presence of Stock Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(2), pages 239-250.
    9. E. Philip Howrey & Saul H. Hymans, 1978. "The Measurement and Determination of Loanable-Funds Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 655-685.
    10. Grauer, Frederick L. A. & Litzenberger, Robert H. & Stehle, Richard E., 1976. "Sharing rules and equilibrium in an international capital market under uncertainty," Journal of Financial Economics, Elsevier, vol. 3(3), pages 233-256, June.
    11. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
    12. Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(1), pages 37-50.
    13. Stulz, ReneM., 1981. "A model of international asset pricing," Journal of Financial Economics, Elsevier, vol. 9(4), pages 383-406, December.
    14. Carlino, Gerald A., 1982. "Interest rate effects and intertemporal consumption," Journal of Monetary Economics, Elsevier, vol. 9(2), pages 223-234.
    15. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters, in: Research in Taxation, pages 3-27, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carol L. Osler, 1987. "Factor Prices and Welfare Under Integrated Capital Markets," NBER Working Papers 2447, National Bureau of Economic Research, Inc.
    2. Kotlikoff, Laurence J, 1984. "Taxation and Savings: A Neoclassical Perspective," Journal of Economic Literature, American Economic Association, vol. 22(4), pages 1576-1629, December.
    3. Engen, Eric M. & Gravelle, Jane G. & Smetters, Kent, 1997. "Dynamic Tax Models: Why They Do the Things They Do," National Tax Journal, National Tax Association;National Tax Journal, vol. 50(3), pages 657-682, September.
    4. Fischer Black, 1989. "Equilibrium Exchange Rate Hedging," NBER Working Papers 2947, National Bureau of Economic Research, Inc.
    5. Summers, Lawrence H, 1984. "The After-Tax Rate of Return Affects Private Savings," American Economic Review, American Economic Association, vol. 74(2), pages 249-253, May.
    6. Philemon Kwame Opoku, 0. "The Short-Run and Long-Run Determinants of Household Saving: Evidence from OECD Economies," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 0, pages 1-35.
    7. Engen, Eric M. & Gravelle, Jane G. & Smetters, Kent, 1997. "Dynamic Tax Models: Why They Do the Things They Do," National Tax Journal, National Tax Association, vol. 50(3), pages 657-82, September.
    8. Philemon Kwame Opoku, 2020. "The Short-Run and Long-Run Determinants of Household Saving: Evidence from OECD Economies," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(3), pages 430-464, September.
    9. Lawrence H. Summers, 1982. "Tax Policy, the Rate of Return, and Savings," NBER Working Papers 0995, National Bureau of Economic Research, Inc.
    10. Don Fullerton & Yolanda Kodrzycki Henderson, 1987. "The Impact of Fundamental Tax Reform on the Allocation of Resources," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 401-444, National Bureau of Economic Research, Inc.
    11. Thomas Chiang & Jose Trinidad, 1997. "Risk and International Parity Conditions: A Synthesis from Consumption Based Models," International Economic Journal, Taylor & Francis Journals, vol. 11(2), pages 73-101.
    12. B. Douglas Bernheim & John B. Shoven, 1988. "Pension Funding and Saving," NBER Chapters, in: Pensions in the U.S. Economy, pages 85-114, National Bureau of Economic Research, Inc.
    13. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc.
    14. Yvonne Adema, 2010. "Pensions, Debt and Inflation Risk in a Monetary Union," Tinbergen Institute Discussion Papers 10-109/2, Tinbergen Institute.
    15. Campbell R. Harvey & Bruno Solnik & Guofu Zhou, 2002. "What Determines Expected International Asset Returns?," Annals of Economics and Finance, Society for AEF, vol. 3(2), pages 249-298, November.
    16. Gleizer, Daniel Luiz, 1991. "Saving and Real Interest Rates in Brazil," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 11(1), April.
    17. Benjamin M. Friedman, 1983. "Managing the U.S. Government Deficit in the 1980s," NBER Working Papers 1209, National Bureau of Economic Research, Inc.
    18. Hausman, Jerry A & Poterba, James M, 1987. "Household Behavior and the Tax Reform Act of 1986," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 101-119, Summer.
    19. Koedijk, Kees G. & Kool, Clemens J. M. & Schotman, Peter C. & van Dijk, Mathijs A., 2002. "The cost of capital in international financial markets: local or global?," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 905-929, November.
    20. Douglas W. Elmendorf, "undated". "The Effect of Interest-Rate Changes on Household Saving and Consumption: A Survey," Finance and Economics Discussion Series 1996-27, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2441. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.