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Financial Exchange Rates and International Currency Exposures

Listed author(s):
  • Philip R. Lane
  • Jay C. Shambaugh

In order to gain a better empirical understanding of the international financial implications of currency movements, we construct a database of international currency exposures for a large panel of countries over 1990-2004. We show that trade-weighted exchange rate indices are insufficient to understand the financial impact of currency movements and that our currency measures have high explanatory power for the valuation term in net foreign asset dynamics. Exchange rate valuation shocks are sizable, not quickly reversed, and may entail substantial wealth redistributions. Further, we show that many developing countries have substantially reduced their negative foreign currency positions over the last decade. (F31, F32, G15)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.1.518
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File URL: http://www.aeaweb.org/aer/data/mar2010/20071105_data.zip
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 100 (2010)
Issue (Month): 1 (March)
Pages: 518-540

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Handle: RePEc:aea:aecrev:v:100:y:2010:i:1:p:518-40
Note: DOI: 10.1257/aer.100.1.518
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  1. Marco E. Terrones & Enrique G. Mendoza & Ceyhun Bora Durdu, 2008. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Mercantilism," 2008 Meeting Papers 56, Society for Economic Dynamics.
  2. Philip R. Lane & Michael B. Devereux,Juanyi Xu, 2005. "Exchange Rates and Monetary Policy in Emerging Market Economies," The Institute for International Integration Studies Discussion Paper Series iiisdp036, IIIS.
  3. Richard Portes, 2005. "The Determinants of Cross-Border Equity Flows," Post-Print halshs-00754100, HAL.
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  5. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
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  7. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An Equilibrium Model of Global Imbalances and Low Interest Rates," 2006 Meeting Papers 894, Society for Economic Dynamics.
  8. Anna Pavlova & Roberto Rigobon, 2003. "Asset Prices and Exchange Rates," NBER Working Papers 9834, National Bureau of Economic Research, Inc.
  9. P Martin & H Rey, 2000. "Financial Super-Markets: Size Matters for Asset Trade," CEP Discussion Papers dp0450, Centre for Economic Performance, LSE.
  10. Maurice Obstfeld, 2004. "External Adjustment," NBER Working Papers 10843, National Bureau of Economic Research, Inc.
  11. John Y. Campbell & Karine Serfaty-de Medeiros & Luis M. Viceira, 2007. "Global Currency Hedging," NBER Working Papers 13088, National Bureau of Economic Research, Inc.
  12. Lane, Philip R. & Shambaugh, Jay C, 2008. "The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets," CEPR Discussion Papers 6887, C.E.P.R. Discussion Papers.
  13. Akito Matsumoto & Charles Engel, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund.
  14. Enrique G. Mendoza & Vincenzo Quadrini & Jose-Victor Rios-Rull, 2007. "Financial Integration, Financial Deepness and Global Imbalances," NBER Working Papers 12909, National Bureau of Economic Research, Inc.
  15. Charles Engel & Akito Matsumoto, 2006. "Portfolio Choice in a Monetary Open-Economy DSGE Model," NBER Working Papers 12214, National Bureau of Economic Research, Inc.
  16. 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.
  17. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege," CEPR Discussion Papers 5220, C.E.P.R. Discussion Papers.
  18. Barry J. Eichengreen & Donald J Mathieson, 2000. "The Currency Composition of Foreign Exchange Reserves; Retrospect and Prospect," IMF Working Papers 00/131, International Monetary Fund.
  19. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, vol. 80(2), pages 157-175, March.
  20. Michael B. Devereux & Alan Sutherland, 2007. "Solving for Country Portfolios in Open Economy Macro Models," Working Papers 162007, Hong Kong Institute for Monetary Research.
  21. Harald Hau & Hélène Rey, 2006. "Exchange Rates, Equity Prices, and Capital Flows," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 273-317.
  22. Devereux, Michael B & Saito, Makoto, 2006. "A Portfolio Theory of International Capital Flows," CEPR Discussion Papers 5746, C.E.P.R. Discussion Papers.
  23. Devereux, Michael B. & Sutherland, Alan, 2008. "Country portfolios in open economy macro models," Globalization and Monetary Policy Institute Working Paper 09, Federal Reserve Bank of Dallas.
  24. 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, vol. 9(Jan).
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  26. Ewe-Ghee Lim, 2006. "The Euro’s Challenge to the Dollar; Different Views from Economists and Evidence from COFER (Currency Composition of Foreign Exchange Reserves) and Other Data," IMF Working Papers 06/153, International Monetary Fund.
  27. Francis E. Warnock, 2006. "How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?," IMF Working Papers 06/170, International Monetary Fund.
  28. Chris Becker & Daniel Fabbro, 2006. "Limiting Foreign Exchange Exposure through Hedging: The Australian Experience," RBA Research Discussion Papers rdp2006-09, Reserve Bank of Australia.
  29. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2003. "International Financial Integration," CEPR Discussion Papers 3769, C.E.P.R. Discussion Papers.
  30. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373, 03.
  31. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
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  33. Enrique G. Mendoza & Ceyhun Bora Durdu & Marco Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies; An Assessment of the New Merchantilism," IMF Working Papers 07/146, International Monetary Fund.
  34. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 301-352.
  35. Gian M Milesi-Ferretti & Philip R. Lane, 2005. "Financial Globalization and Exchange Rates," IMF Working Papers 05/3, International Monetary Fund.
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