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Mr. Alan Sutherland and Michael B. Devereux
This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. the method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios.
Mr. Alan Sutherland and Michael B. Devereux

portfolio holdings evolve over time at the first order. For simple models, optimal portfolios may be derived analytically. For more complex models, the paper provides a simple, one step, computationally efficient approach to generating numerical results. 4 The approach to characterizing portfolio dynamics here is based on Taylor-series approximation of a model’s equilibrium conditions. The standard log-linear approximation procedures used in macroeconomics can not be directly applied to portfolio problems. This is for two reasons. Firstly, the equilibrium portfolio is

Fabio Cortes and Luca Sanfilippo
Unconstrained multi-sector bond funds (MSBFs) can be a source of spillovers to emerging markets and potentially exert a sizable impact on cross-border flows. MSBFs have grown their investment in emerging markets in recent years and are highly concentrated—both in their positions and their decision-making. They typically also exhibit opportunistic behavior much more so than other investment funds. Theoretically, their size, multisector mandate, and unconstrained nature allows MSBFs to be a source of financial stability in periods of wide-spread market turmoil while others sell at fire-sale prices. However, this note, building on the analysis of Cortes and Sanfilippo (2020) and incorporating data around the COVID-19 crisis, finds that MSBFs could have contributed to increase market stress in selected emerging markets. When faced with large investor redemptions during the crisis, our sample of MSBFs chose to rebalance their portfolios in a concentrated manner, raising a large proportion of cash in a few specific local currency bond markets. This may have contributed to exacerbating the relative underperformance of these local currency bond markets to broader emerging market indices.
Mr. Gian M Milesi-Ferretti and Mr. Philip R. Lane

Front Matter Page Research Department Contents I. Introduction II. Trends in Global Imbalances, 1994–2004 III. The Dynamics of External Positions A. An Accounting Framework B. Recent Evolution: Selected Countries C. Return Differentials and Capital Gains: Some Historical Evidence D. Summary and Discussion IV. Global Portfolio Dynamics A. Recent Trends B. An Analysis of Portfolio Dynamics C. Looking to the Future V. Conclusions References Tables 1. Decomposition of Change in Net Foreign Assets, 1995–2000 2

Fabio Cortes and Luca Sanfilippo

Portfolio Dynamics—Size and Concentration 1 Prior to the COVID-19 pandemic, emerging economies increasingly saw portfolio debt inflows from a type of large international investment fund: multi-sector bond funds (MSBFs) . The assets of the funds in a sample of 40 large MSBFs have more than doubled since the global financial crisis to about $1 trillion (nearly 10 percent of the entire bond investment fund sector globally). Their aggregate emerging market investment has ranged between $100 billion-$160 billion in recent years (peaking at about $160 billion in

International Monetary Fund. Research Dept.

/280 Changing Nature of North-South Linkages: Stylized Facts and Explanations Akin, Çigdem; Kose, M. Ayhan No. 07/281 International Diversification Gains and Home Bias in Banking García-Herrero, Alicia; Vázquez, Francisco F. No. 07/282 An Estimated DSGE Model for Monetary Policy Analysis in Low-Income Countries Peiris, Shanaka J.; Saxegaard, Magnus No. 07/283 Country Portfolio Dynamics Devereux, Michael B.; Sutherland, Alan No. 07/284 Solving for Country Portfolios in Open Economy Macro Models Devereux, Michael B

Mr. Gian M Milesi-Ferretti and Mr. Philip R. Lane
This paper highlights the increased dispersion in net external positions in recent years, particularly among industrial countries. It provides a simple accounting framework that disentangles the factors driving the accumulation of external assets and liabilities (such as trade imbalances, investment income flows, and capital gains) for major external creditors and debtors. It also examines the factors driving the foreign asset portfolio of international investors, with a special focus on the weight of U.S. liabilities in the rest of the world's stock of external assets. Finally, it relates the empirical evidence to the current debate about the roles of portfolio balance effects and exchange rate adjustment in shaping the external adjustment process.
Ms. Malika Pant and Yanliang Miao

Sergio Schmukler. ( 2010 ). “ Financial Crises and International Portfolio Dynamics. ” Mimeo . Calvo , Guillermo , Alejandro Izquierdo , and Luis-Fernando Mejía . ( 2004 ). “ On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects. ” NBER Working Paper 10520 . Calvo , Guillermo , Alejandro Izquierdo , and Luis-Fernando Mejía . ( 2008 ). “ Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration. ” NBER Working Paper 14026 . Calvo , Guillermo , Leonardo Leiderman , and Carmen

Ms. Malika Pant and Yanliang Miao
Capital flows data from Balance of Payments statistics often lag 3-6 months, which renders timely surveillance and policy deliberation difficult. To address the tension, we propose two coincident composite indicators for capital flows that improve upon existing proxies. We find that the most widely used proxy, the capital tracker, often overpredicts net flows by 30 percent. We augment the tracker into a composite indicator by assigning to it a lesser but optimally estimated weight while incorporating other regional and global coincident correlates of capital flows. The proposed composite indicator of net flows outperforms the capital tracker in its original format. To complement the indicator with an even timelier variant, we also utilize the EPFR high frequency coverage of gross bond and equity flows as an indicator on foreign investors' sentiment.
Mr. Akito Matsumoto and Mr. Charles Engel
Well-known empirical puzzles in international macroeconomics concern the large divergence of equilibrium outcomes for consumption across countries from the predictions of models with full risk sharing. It is commonly believed that these risk-sharing puzzles are related to another empirical puzzle-the home-bias in equity puzzle. However, we show in a series of dynamic models that the full risk sharing equilibrium may not require much diversification of equity portfolios when there is price stickiness of the degree typically calibrated in macroeconomic models. This conclusion holds under a range of assumptions about home bias in preferences, price setting as PCP or LCP, and with or without nominal wage stickiness as long as there is some price rigidity.