Abstract:
This paper points out that many small open economies hold foreign asset portfolios composed of positive liquid low-return net foreign assets and illiquid high-return net foreign liabilities, that gross position often a much larger than net position, and that a large share of both are denominated in foreign currency. This exposes countries to exchange rate, return and valuation risks. These risks are not equally shared across the population due to differences in wealth and portfolio compositions. We then study the impact of these aspects in an open economy HANK model that is estimated on South Korean data. We find important differences in the impact of foreign shocks on domestic business cycles depending on their source and that foreign shocks are important drivers of inequality.
The seminar will be held in room 1249 (12th floor) at Eilert Sundts Hus. The address is Moltke Moes vei 31.