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The long or short of it: Determinants of foreign currency exposure in external balance sheets

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  • Lane, Philip R.
  • Shambaugh, Jay C.

Abstract

A major focus of the recent literature on the determination of optimal portfolios in open-economy macroeconomic models has been on the role of currency movements in determining portfolio returns that may hedge various macroeconomic shocks. However, there is little empirical evidence on the foreign currency exposures that are embedded in international balance sheets. Using a new database, we provide stylized facts concerning the cross-country and time-series variation in aggregate foreign currency exposure and its various subcomponents. In panel estimation, we find that richer, more open economies take longer foreign-currency positions. In addition, we find that an increase in the propensity for a currency to depreciate during bad times is associated with a longer position in foreign currencies, providing a hedge against domestic output fluctuations. We view these new stylized facts as informative in their own right and also potentially useful to the burgeoning theoretical literature on the macroeconomics of international portfolios.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 80 (2010)
Issue (Month): 1 (January)
Pages: 33-44

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Handle: RePEc:eee:inecon:v:80:y:2010:i:1:p:33-44

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Financial globalization Exchange rates International portfolios;

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  1. Neumeyer, Pablo Andres, 1998. "Currencies and the Allocation of Risk: The Welfare Effects of a Monetary Union," American Economic Review, American Economic Association, vol. 88(1), pages 246-59, March.
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  3. Philip Lane & Jay C. Shambaugh, 2007. "Financial Exchange Rates and International Currency Exposures," NBER Working Papers 13433, National Bureau of Economic Research, Inc.
  4. Sebastian Edwards, 2007. "Capital Controls, Capital Flow Contractions, and Macroeconomic Vulnerability," NBER Working Papers 12852, National Bureau of Economic Research, Inc.
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  7. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
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  9. Soyoung Kim, 2002. "Nominal Revaluation of Cross-Border Assets, Terms-of-Trade Changes, International Portfolio Diversification, and International Risk Sharing," Southern Economic Journal, Southern Economic Association, vol. 69(2), pages 327-344, October.
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  13. Julian di Giovanni & Jay C. Shambaugh, 2006. "The Impact of Foreign Interest Rateson the Economy," IMF Working Papers 06/37, International Monetary Fund.
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  18. André Faria & Philip R. Lane & Paolo Mauro & Gian Maria Milesi-Ferretti, 2007. "The Shifting Composition of External Liabilities," The Institute for International Integration Studies Discussion Paper Series iiisdp190, IIIS.
  19. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2000. "External Capital Structure: Theory and Evidence," CEPR Discussion Papers 2583, C.E.P.R. Discussion Papers.
  20. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2000. "External Capital Structure," IMF Working Papers 00/152, International Monetary Fund.
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