The Valuation Channel of External Adjustment
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Summary:
International financial integration has greatly increased the scope for changes in a country's net foreign asset position through the valuation channel, namely capital gains and losses on external assets and liabilities. We examine this valuation channel in a dynamic equilibrium portfolio model with international trade in equity. By separating asset prices and quantities, we can characterize the first-order dynamics of valuation effects and the current account in macroeconomic dynamics. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete.
Series:
Working Paper No. 09/275
Subject:
Asset prices Capital transactions Current account Economic models External shocks Financial sector Foreign exchange Government expenditures International capital markets Productivity
English
Publication Date:
December 1, 2009
ISBN/ISSN:
9781451874204/1018-5941
Stock No:
WPIEA2009275
Format:
Paper
Pages:
44
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