A GENERAL EQUILIBRIUM-MODEL OF INTERNATIONAL PORTFOLIO CHOICE

We investigate, in a two-country general equilibrium model, whether a bias in consumption towards domestic goods will necessarily lead to a preference for domestic securities. We develop a model where investors are constrained to consume only from their domestic capital stock and where it is costly to transfer capital across countries. In this mode l, investors less risk averse than an investor with log utility bias t heir portfolios towards domestic assets. Investors more risk averse th an log, however, prefer foreign assets. Thus, this model suggests that it is unlikely that the portfolios observed empirically can be explai ned by the high proportion of domestic goods in total consumption.