portfolio balance, and how it ameliorates the affect of current account deficits

1. In each country, there is a bias towards home holdings of equities.
2. A transfer of wealth to another country, coupled with this home bias, means that equity prices rise faster in that foreign country, and equity prices in the domestic country are relatively lower.
3. This results in capital gain on your holdings of foreign equities, and an opposite effect on foreign holdings of domestic equities.
4. So this will ameliorate the decline in your net asset position.

Question: then what happens when you try to realize the gain?


Exactly the same thing can be done with home bias in bonds.
This time the mechanism is through domestic currency depreciation
1% balanced dollar depreciation : 0.4375% GDP, or $50 billion transfer to the United States

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