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Valuation Effects and the Dynamics of Net External Assets

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Author Info
Michael B. Devereux
Alan Sutherland

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Abstract

The traditional current account can be an inaccurate measure of the change in the net foreign asset (NFA) position. Using gross asset and liability positions at the country level, a number of 'valuation effects' have been identified which contribute to changes in NFA but do not enter the reported current account. This paper uses new developments in the analysis of portfolio allocation in general equilibrium to investigate valuation effects in a two-country model. The model can be used to analyze both qualitatively and quantitatively the role of valuation effects. Broadly speaking, the valuation effects in the model correspond to those in the data, and have the effect of enhancing cross country risk sharing. But there is a key distinction between "unanticipated" and "anticipated" valuation effects. Unanticipated effects can be large, dominating the movement in NFA, but anticipated effects arise only at higher orders of approximation and are small for reasonable parameterisations. The paper also analyses the determinants of international portfolio positions, and their role in generating valuation effects from asset price and terms of trade changes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14794.

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Date of creation: Mar 2009
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Handle: RePEc:nbr:nberwo:14794

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Matthew Higgins & Thomas Klitgaard & Cédric Tille, 2006. "Borrowing without debt? Understanding the U.S. international investment position," Staff Reports 271, Federal Reserve Bank of New York. [Downloadable!]
  2. Michael B. Devereux & Alan Sutherland, 2007. "Country Portfolio Dynamics," IMF Working Papers 07/283, International Monetary Fund. [Downloadable!]
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  3. Michael B Devereux & Alan Sutherland, 2007. " Country Portfolio Dynamics," CDMA Conference Paper Series 0706, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  4. Cedric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jan. [Downloadable!]
  5. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2007. "The Valuation Channel of External Adjustment," NBER Working Papers 12937, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Martin D. D. Evans & Viktoria Hnatkovska, 2005. "International Capital Flows, Returns and World Financial Integration," NBER Working Papers 11701, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Bottazzi, Laura & Pesenti, Paolo & van Wincoop, Eric, 1996. "Wages, profits and the international portfolio puzzle," European Economic Review, Elsevier, vol. 40(2), pages 219-254, February. [Downloadable!] (restricted)
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