Professional Documents
Culture Documents
International Macroeconomics
Drawbacks (I)
Drawbacks (II)
∞
U = Et ∑ βτ t
[u (Cτ ) + υ (.)]
τ =t
International Macroeconomics
Devereux and Sutherland method
Basic framework
Assume n assets
Asset holdings of H households α1 , ..., αn - denominated in
units of H consumption good
H households wealth
n
Wt = ∑ αi ,t
i =1
r 0 = [r1t , ...rnt ]
International Macroeconomics
Devereux and Sutherland method
Basic framework
n n
Wt = ∑ αi ,t = ∑ αi ,t 1 rit + Yt Ct
i =1 i =1
where Yt = PH YH /P
0 = [(r
rxt rnt ) , ..., (rn rnt )] and
1t 1t
n n 1
Wt = ∑ αi ,t = ∑ αi ,t 1 rit + rnt Wt 1 + Yt Ct =
i =1 i =1
= αt0 1 rit + rnt Wt 1 + Yt Ct
F agents bc is
1 ? 1 ?0
W = α rit + rnt Wt? + Yt Ct
Q t Q t 1 1
International Macroeconomics
Devereux and Sutherland method
Basic framework
Optimality conditions
∞
max . : U = Et
fct ,αi g
∑ βτ t
[u (Cτ ) + υ (.)]
τ =t
n n 1
st : Wt = ∑ αi ,t = ∑ αi ,t 1 rit + rnt Wt 1 + Yt Ct
i =1 i =1
Indeterminacy problem
Non-stochastic SS
u 0 (Ct +1 ) u 0 (Ct +1 )
1 = βEt rit +1 = βEt rnt +1 )
u 0 (Ct ) u 0 (Ct )
) r1SS = r1SS = (1/β)
W t W̄
De…ne Ŵt = C̄
and r̂xt = r̂it r̂nt
ᾱ
α̃ = βȲ
International Macroeconomics
Devereux and Sutherland method
DS procedure
Basic principle
1
Ŵt = Ŵt 1 + α̃0 r̂xt + Yt Ct
β
International Macroeconomics
Devereux and Sutherland method
DS procedure
Basic principle
Portfolio equations
Sum them
1 2 1
Et fr̂xt +1 g = Et r̂xt +1 + ρ Ĉt +1 Ĉt +1 Q̂t +1 /ρ (r̂xt +1 )
2 2
1
Ŵt = Ŵt 1 + ξ t + Yt Ct
β
Full model linearized to 1rst order
st + 1 s
A1 = A2 t + A3 xt + Bξ t
Et c t + 1 ct
st +1 = F1 xt + F2 st + F3 ξ t
ct = P1 xt + P2 st + P3 ξ t
International Macroeconomics
Devereux and Sutherland method
DS procedure
r̂xt +1 = R1 ξ t +1 + R2 εt +1
Recall ξ is endogenous
ξ xt +1 = α̃0 rxt +1
α̃0 R2
r̂xt +1 = R1 + R2 εt +1
1 α̃0 R1
International Macroeconomics
Devereux and Sutherland method
DS procedure
st + 1
Ĉt +1 Ĉt +1 Q̂t +1 /ρ = D1 ξ t +1 + D2 εt +1 + D3
xt
α̃0 R2 st + 1
D1 + D2 ε t + 1 + D3
1 α̃0 R1 xt
1
α̃ = R2 ΣD20 R10 D1 R2 ΣR20 R2 ΣD20
International Macroeconomics
Devereux and Sutherland method
An example
Model setup
u (Ct ) = 1
(1 ρ ) (Ct )1 ρ
σ2Y 0
Var =
0 σ2Y
Two bonds. H bc:
Wt = αB ,t + αB? ,t = αB ,t 1 rBt + αB? ,t ?
1 rBt + Yt Ct
International Macroeconomics
Devereux and Sutherland method
An example
Model setup
?
rBt = RB ,t Pt 1 /Pt and rBt = RB? ,t Pt? 1 /Pt?
LOP ) P = SP ? ) Q = 1
Money demands
n o n o
(Ct ) ρ
= βEt (Ct +1 ) ρ
rBt +1 = βEt (Ct +1 ) ρ ?
rBt +1
n o n o
ρ ρ
(Ct? ) ρ
= βEt Ct?+1 rBt +1 = βEt Ct?+1 ?
rBt +1
Ct + Ct? = Yt + Yt?
Et fr̂Bt ? g = 0 ) (R
r̂Bt ? )=
RBt
1 Bt
Et 1 (Pt ) Pt 1 Et 1 (Pt ) + Pt? 1
?
(r̂Bt ? ) = R̂
r̂Bt ? + P̂
R̂Bt P̂t P̂t? + P̂t? =
Bt t 1 1
?
De…ne Et (rBt +1 ) = Et rBt E
+1 = r̂t
PtE = Et P̂t +1
PtE ? = Et P̂t?+1
International Macroeconomics
Devereux and Sutherland method
An example
Variables
1
α̃ = R2 ΣD20 R10 D1 R2 ΣR20 R2 ΣD20
σ2Y
α̃B = α̃B? =
2 (σ2M + σ2Y ) (1 βζ Y )
H households sell the bond in their own currency and buy the
bond in the foreign currency
International Macroeconomics
Devereux and Sutherland method
An example
σ2Y
α̃B = α̃B? =
2 (σ2M + σ2Y ) (1 βζ Y )
Not stationary!
International Macroeconomics
Devereux and Sutherland method
An example
0.5 0.5
0 0
20 40 60 80 100 20 40 60 80 100
0.5 0.5
0 0
20 40 60 80 100 20 40 60 80 100
International Macroeconomics
Devereux and Sutherland method
An example
0 0 0
-1 -1 -1
20 40 60 80 100 20 40 60 80 100 20 40 60 80 100
0.5 0.5
0 0
-0.5 -0.5
-1 -1
20 40 60 80 100 20 40 60 80 100
International Macroeconomics
Devereux and Sutherland method
An example
0.5 0.5
0 0
-0.5 -0.5
-1 -1
20 40 60 80 100 20 40 60 80 100
0.5
-0.5
-1
10 20 30 40 50 60 70 80 90 100
0.5
-0.5
-1
10 20 30 40 50 60 70 80 90 100
International Macroeconomics
Devereux and Sutherland method
An example
0.5 0.5
0 0
20 40 60 80 100 20 40 60 80 100
0.5 0.5
0 0
20 40 60 80 100 20 40 60 80 100
International Macroeconomics
Devereux and Sutherland method
An example
0 0 0
-1 -1 -1
20 40 60 80 100 20 40 60 80 100 20 40 60 80 100
0.5 0.5
0 0
-0.5 -0.5
-1 -1
20 40 60 80 100 20 40 60 80 100
International Macroeconomics
Devereux and Sutherland method
An example
0.5 0.5
0 0
-0.5 -0.5
-1 -1
20 40 60 80 100 20 40 60 80 100
0.5
-0.5
-1
10 20 30 40 50 60 70 80 90 100
0.5
-0.5
-1
10 20 30 40 50 60 70 80 90 100
International Macroeconomics
Devereux and Sutherland method
Some issues about DS method
Other issues
Can retrieve closed form solution for shares only if model fairly
simple