## The Valuation Channel of External Adjustment

_IMF Working Papers, December 1, 2009_

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## Bibliographic details
- Authors: Jaewoo Lee, Fabio Ghironi, Alessandro Rebucci
- Published: December 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451874204.001

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### Abstract / 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.
- The paper examines the valuation channel in a dynamic equilibrium portfolio model with international trade in equity.
- By separating asset prices and quantities, the authors characterize the first-order dynamics of valuation effects and the current account in macroeconomic dynamics.
- The analysis disentangles the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete.

### Authors and Publication
- Authors: Jaewoo Lee, Fabio Ghironi, Alessandro Rebucci
- Publication date: December 1, 2009
- Series: Working Paper No. 2009/275
- Issue: 275
- Volume: 2009
- Pages: 44
- DOI: https://doi.org/10.5089/9781451874204.001
- Stock No: WPIEA2009275
- ISBN: 9781451874204
- ISSN: 1018-5941

### Methodology and Analytical Framework
- Framework: Dynamic equilibrium portfolio model with international trade in equity.
- Key modeling approach: Separation of asset prices and asset quantities to identify first-order dynamics.
- Focus: Interaction among excess returns, capital gains, and portfolio adjustment under financial market incompleteness.
- Outcome measures: Valuation effects on net foreign asset positions and implications for the current account and consumption risk sharing.

### Key Findings
- International financial integration amplifies potential changes in net foreign asset positions via valuation (capital gains and losses).
- Valuation effects can materially affect the current account dynamics once asset price and quantity dynamics are separated.
- Excess returns, capital gains, and portfolio adjustment play distinct roles in enabling or constraining consumption risk sharing across countries when markets are incomplete.

### Policy-Relevant Implications
- Monitoring valuation-driven changes in net foreign assets is essential for understanding external adjustment beyond trade flows.
- Consideration of asset price dynamics and portfolio composition is important for assessing vulnerabilities related to cross-border equity holdings.
- Policies aimed at improving consumption risk sharing should account for the limited role of portfolio adjustment under market incompleteness and the separate contributions of excess returns and capital gains.

_Italic: IMF Working Paper — "The Valuation Channel of External Adjustment" by Jaewoo Lee, Fabio Ghironi, and Alessandro Rebucci; accessed 9/18/2026; DOI: https://doi.org/10.5089/9781451874204.001_

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-valuation-channel-of-external-adjustment-23447_