Date of Completion
Pricing to Market, Home Bias in Consumption, Current Account
Field of Study
Doctor of Philosophy
This analysis examines the effects of non-zero net foreign assets and home bias in consumption on current account volatility within the euro area in 1996-2016. Incorporating non-homothetic preferences into a two-country general equilibrium model of current account dynamics yields pricing-to-market based upon income per capita. This specification enables the model to generate the more realistic outcome of long-run non-zero net foreign asset positions and provides a channel to measure the influence of home bias in consumption on current account volatility. The model is calibrated with shocks to productivity, financial frictions and taxation schemes to replicate current account volatility by both creditor and debtor countries within the euro area. I find that as the magnitude of net foreign asset position and degree of home bias in consumption grow, the response of the current account to shocks to productivity and financial frictions is dampened. Finally, the model predicts greater current account response to fiscal shocks as a country’s external imbalance grows.
Lorenzo, Michael, "Net Foreign Asset Position, Home Bias in Consumption and Current Account in the Euro Area" (2018). Doctoral Dissertations. 1889.