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International Currency Portfolios

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  • Michael Kumhof

    (International Monetary Fund)

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.

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  • Michael Kumhof, 2010. "International Currency Portfolios," 2010 Meeting Papers 84, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:84
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    1. Kumhof, Michael, 2018. "On the theory of international currency portfolios," European Economic Review, Elsevier, vol. 101(C), pages 376-396.

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