Financial integration and the wealth effect of exchange rate fluctuations

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractA growing body of research emphasizes the direct impact of exchange rate movements on the value of U.S. foreign assets. Because a substantial amount of U.S. assets are denominated in foreign currencies, a depreciation of the dollar leads to large capital gains. First, we present a detailed decomposition of the U.S. balance sheet, which exhibits substantial leverage in terms of currencies and across asset categories. The United States holds 50 percent of GDP in foreign-currency assets and is long in FDI (foreign direct investment) and equity positions and short in debt and banking positions. Then, we incorporate these features of international financial integration in a simple general equilibrium model and analyze how they affect the international transmission of monetary shocks. We find that financial integration is a central component of the model, with the valuation gains from an exchange rate depreciation leading to a welfare effect that is at least as large as that stemming from nominal rigidities alone but possibly much larger. We characterize how interdependence is affected by the composition of the portfolio across asset categories and how structural features of the model interact with financial integration.

The valuation channel of external adjustment

“…Consumption growth between periods t − 1 and t depends on the current account and valuation at t − 1, as well as on growth in productivity, government spending, and excess returns in period t. 36 Note that, given câ t ≡ α∆x D t+1 / (1 − G) and equation (25), we can further decompose the contribution of portfolio adjustment at t − 1 to consumption growth in 34 Benigno (2009) and Tille (2008) address the role of unanticipated valuation effects for welfare in perfect foresight models with exogenous portfolios. Some numerical results on the role of valuation in risk sharing are in Devereux and Sutherland (2009b).…”

“…See, for instance, Benigno (2009) and Tille (2008). Lane and Milesi-Ferretti (2009) document the importance of equity price movements for the dynamics of U.S. net foreign assets.…”

“…Blanchard, Giavazzi, and Sa (2005) set up a traditional portfolio balance model with imperfect asset substitutability along the lines of Kouri (1982) and discuss 7 valuation effects caused by exchange rate movements, with no emphasis on equity prices. Tille (2008) studies the welfare implications of valuation effects from both equity and bonds, and Benigno (2009) provides a normative analysis of valuation effects, focusing on economies in which trade is restricted to nominal bonds. Both these papers assume perfect foresight and exogenously determined initial asset positions, and they focus on unanticipated valuation effects in the impact period of shocks.…”

The Valuation Channel of External Adjustment

“…Substituting the solutions for the elasticities obtained above into (48) and rearranging yields the solution for the steady-state portfolio discussed in the main text:…”

Debt Dynamics and Global Imbalances: Some Conventional Views Reconsidered

“…Assets are assumed to be denominated in the currency of the issuing region, which is important in determining currency valuation effects in the simulations. This assumption is approximately true for foreign holdings of U.S. assets, but not for U.S. holdings of foreign assets: estimates for 2005 indicate that about 35 percent of U.S. external assets were dollardenominated (Tille (2005)). No figures are available for 1995, and the data are initialized around the assumption that this share is zero.…”