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Nominal Exchange Rates and Net Foreign Assets' Dynamics: the Stabilization Role of Valuation Effects

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  • Sara Eugeni

    (Durham Business School)

Abstract

This paper proposes a theory of nominal exchange rate determination to shed light on its role in countries’ portfolio choices and its impact on the dynamics of net foreign assets through valuation effects. The model can rationalize the behavior of the US external position over the past 20 years, which has been characterized by persistent current account deficits and stabilizing valuation effects, as a consequence of the increase in emerging market countries’ share of world GDP. We also show quantitatively that the valuation channel is a key component of the process of external adjustment, consistently with the empirical literature.

Suggested Citation

  • Sara Eugeni, 2017. "Nominal Exchange Rates and Net Foreign Assets' Dynamics: the Stabilization Role of Valuation Effects," Working Papers 2017_09, Durham University Business School.
    • Handle: RePEc:dur:durham:2017_09
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    More about this item

    Keywords

    nominal exchange rate determination; valuation effects; endogenous portfolio choice; net foreign assets’ dynamics; incomplete markets; overlapping-generations economies;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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