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Key Facts

  • Project Start: Feb 15 2008
  • Project End: Feb 14 2010
  • Coordinator: German Institute for Economic Research (DIW Berlin)
  • EU Contribution:
    998 170 EUR

    • // FINESS Flyer

    Upcoming Events

  • May 10-11 2010, Brussels: International Policy Conference

    • // Programme

    Recent Events

  • April 26 2010, Berlin: Advisory and Steering Committee Meeting

  • January 2010: 4th Steering Group Meeting

  • Sept 14 2009, Berlin: 3rd Steering Group Meeting

  • March 5-6 2009, Berlin: International Scientific Conference

  • March 6 2009, Berlin: 2nd Steering Group and Advisory Committee Meeting

  • Sept 8 2008, Berlin: 1st Steering Group Meeting

  • Feb 22 2008, Berlin: Kick-off Meeting

    • Consortium

    Project Structure

    WP4: FINANCIAL SYSTEMS AND HOUSEHOLD PORTFOLIO DECISIONS

    Objectives

  • To explore interaction between goods and financial market integration. International financial market integration offers an opportunity for investors to hedge consumption risk across countries by holding an internationally diversified portfolio in an environment characterized by macroeconomic shocks. The interaction between goods and financial market integration is studied in a framework where the size of the non-traded goods sector is endogenized.
  • Understanding implications of frictions in goods and asset markets. A monetary authority may exert a significant influence on financial assets returns, thereby affecting consumption risk sharing. The framework is extended to discuss the welfare benefits of different integration scenarios for goods and financial markets. Since goods and financial market integration is studied simultaneously, implications on the interactions between these areas are analysed.
  • To clarify the relevance of the social security system for explaining the low share of stocks in financial portfolios of households in many European countries and its contribution to resolve the equity premium puzzle.

    • Work description

  • Development of DSGE model for hedging consumption risks
    Incomplete goods and asset market integration is studied in a two-country framework. Impact of financial market frictions and non-tradability of goods on countries' portfolio allocations is examined in the presence of macroeconomic shocks. Impediments to international trade in financial assets are modelled via transaction costs. Incomplete goods market integration is modelled through the assumption of a non-traded goods sector in each country. Size of the economies' non-traded goods sector is determined endogenously.
  • Model extension to include price rigidities
    The initial model is extended by the introduction of rigidities in the price setting behaviour of firms. We analyze how the size and the composition of international portfolios adjust to a monetary policy shock and how this affects macroeconomic dynamics.
  • Social security systems and risky assets
    Impact of the social security system on household portfolio decisions is investigated within a DSGE life-cycle framework. A positive probability of a low labour income state and labour market frictions could generate observed patterns of holding portfolios of bonds and stocks.
  • Policy implications
    Extraction of policy relevant conclusions. We will examine how the effectiveness of monetary policy is affected by the degree of international financial integration. Possible implications for social security system will be addressed.

    • Workpackage Leader: Claudia Buch

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