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Valuation effects with transitory and trend productivity shocks

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  • Nguyen, Ha

Abstract

Changes in asset prices of a country's foreign assets and liabilities (“valuation effects”) are commonly thought of as stabilizing: they counteract current account movements and mitigate the impact of the current account on the country's net foreign asset (NFA) position. This paper shows that whether valuation effects are stabilizing or not depends critically on the nature of the underlying productivity shocks. In response to transitory shocks, valuation effects are stabilizing; but in response to trend shocks, such effects amplify the impact of the current account on NFA position. These contrasting effects arise because optimally smoothing consumers respond differently to a transitory shock than to a trend shock to income. This theoretical result finds empirical support with G7 countries' data, and is illustrated by the pattern of external imbalances between the U.S. and other G7 countries since the 1990s.

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Bibliographic Info

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

Volume (Year): 85 (2011)
Issue (Month): 2 ()
Pages: 245-255

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Handle: RePEc:eee:inecon:v:85:y:2011:i:2:p:245-255

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

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Keywords: Valuation effects; Current account; External imbalances; Net foreign assets;

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References

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Citations

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Cited by:
  1. Eylem Ersal Kiziler, 2011. "Growth Shocks and Portfolio Flows," Working Papers 11-02, UW-Whitewater, Department of Economics.
  2. Katrin Rabitsch & Serhiy Stepanchuk & Viktor Tsyrennikov, 2014. "International Portfolios: A Comparison of Solution Methods," Department of Economics Working Papers wuwp159, Vienna University of Economics, Department of Economics.
  3. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock, 2013. "On Returns Differentials," NBER Working Papers 18866, National Bureau of Economic Research, Inc.
  4. Jacek Rothert, 2012. "Productivity or Demand? Identifying Sources of Fluctuations in Small Open Economies," 2012 Meeting Papers 187, Society for Economic Dynamics.
  5. Amdur, David & Ersal Kiziler, Eylem, 2012. "Trend shocks and the countercyclical U.S. current account," MPRA Paper 40147, University Library of Munich, Germany.
  6. Curcuru, Stephanie E. & Thomas, Charles P. & Warnock, Francis E., 2013. "On returns differentials," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 1-25.

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