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GTAP Resource #3568

"Portfolio Elasticities and the Evolution of Endogenous Current Account Balances in a CGE Model with International Financial Assets"
by Lemelin, André, Veronique Robichaud and Bernard Decaluwe


Abstract
This paper examines the role of portfolio elasticities in the worldwide recursive dynamic PEP-w-t-F CGE model with international financial assets.
The model endogenizes current account balances by making explicit international capital flows which balance the current account. Capital flows are constrained by supply-demand equilibrium conditions on the market for international debt securities, determined by portfolio managers’ optimizing behavior. Each country is a single agent, owning a portfolio of assets which constitutes its net wealth. Wealth consists of financial wealth and physical assets (ownership titles to productive capital or claims on the flow of income generated). Financial wealth is made up of international assets and liabilities (debt). The asset-liability structure is endogenous, and it is possible for a country-agent to have negative net financial assets. Borrowing is limited by the willingness of other country-agents to lend, following their own portfolio choices, and by the competition from other borrowing countries.
The cumulative consequences of capital flows on the international investment positions of countries define the constraints under which portfolio choices are made. Interaction between the financial and the real economy may lead, for example, to endogenous sign reversals in current account balances, a feature which is absent in most models. Nonetheless, experiments with the model have shown that the real economy remains the principal driving force determining the simulated evolution of the world economy.
Simulation results depend on the choice of portfolio elasticities. Not all combinations of elasticity values allow for a feasible solution, and the set of feasible combinations is not convex. The analyses presented aim to explore the range of feasible combinations of elasticities, better understand their complex interactions, and examine the sensitivity of results to variations in the elasticities.


Resource Details (Export Citation) GTAP Keywords
Category: 2011 Conference Paper
Status: Published
By/In: Presented at the 14th Annual Conference on Global Economic Analysis, Venice, Italy
Date: 2011
Version:
Created: Lemelin, A. (4/14/2011)
Updated: Lemelin, A. (9/20/2011)
Visits: 1,532
- Dynamic modeling


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