The Valuation Channel of External Adjustment

Author/Editor:

Jaewoo Lee ; Fabio Ghironi ; Alessandro Rebucci

Publication Date:

December 1, 2009

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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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