IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Financial integration and the wealth effect of exchange rate fluctuations

  • Tille, Cédric

Recent years have witnessed a large increase in international financial integration in the form of largely offsetting cross-holdings across countries. We assess how such financial leverage affects the international transmission of monetary shocks, and find that it leads to sizable welfare differentials that far exceed the impact due to nominal rigidities. We document the relevance of the exact nature of holdings, with bond holdings associated with larger effects than equity holdings. The impact of financial leverage on welfare is also sensitive to the extent of exchange rate pass-through and the substitutability between goods produced in different countries.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

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

Volume (Year): 75 (2008)
Issue (Month): 2 (July)
Pages: 283-294

in new window

Handle: RePEc:eee:inecon:v:75:y:2008:i:2:p:283-294
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Michael B. Devereux & Alan Sutherland, 2007. "Solving for Country Portfolios in Open Economy Macro Models," IMF Working Papers 07/284, International Monetary Fund.
  2. Martin D. D. Evans & Viktoria Hnatkovska, 2005. "Solving General Equilibrium Models with Incomplete Markets and Many Assets," NBER Technical Working Papers 0318, National Bureau of Economic Research, Inc.
  3. Andres Velasco & Roberto Chang, 2004. "Monetary Policy and the Currency Denomination of Debt: A Tale of Two Equilibria," NBER Working Papers 10827, National Bureau of Economic Research, Inc.
  4. Mercereau Benoit, 2003. "The Role of Stock Markets in Current Account Dynamics: a Time Series Approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-30, April.
  5. Helene Rey & Pierre Olivier Gourinchas, 2005. "International Financial Adjustment," 2005 Meeting Papers 169, Society for Economic Dynamics.
  6. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable U.S. Current Account Position Revisited," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376 National Bureau of Economic Research, Inc.
  7. Coeurdacier, Nicolas, 2008. "Do Trade Costs in Goods Market Lead to Home Bias in Equities?," CEPR Discussion Papers 6991, C.E.P.R. Discussion Papers.
  8. Ghironi, Fabio & Iscan, Talan B. & Rebucci, Alessandro, 2008. "Net foreign asset positions and consumption dynamics in the international economy," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1337-1359, December.
  9. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  10. Philip R. Lane & G Milesi-Feretti, 2004. "Financial Globalization and Exchange Rates," CEP Discussion Papers dp0662, Centre for Economic Performance, LSE.
  11. Burger, John D. & Warnock, Francis E., 2007. "Foreign participation in local currency bond markets," Review of Financial Economics, Elsevier, vol. 16(3), pages 291-304.
  12. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," Working Papers 112006, Hong Kong Institute for Monetary Research.
  13. Robert Kollmann, 2005. "International Asset Portfolios: A Dynamic General Equilibrium Perspective," 2005 Meeting Papers 184, Society for Economic Dynamics.
  14. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  15. Gian M Milesi-Ferretti & Philip R. Lane, 2005. "A Global Perspectiveon External Positions," IMF Working Papers 05/161, International Monetary Fund.
  16. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
  17. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2006. "The Valuation Channel of External Adjustment," 2006 Meeting Papers 195, Society for Economic Dynamics.
  18. Michele Cavallo & Fabio Ghironi, 2000. "Net Foreign Assets and the Exchange Rate: Redux Revived," Boston College Working Papers in Economics 505, Boston College Department of Economics, revised 01 Feb 2002.
  19. Michael A. Kouparitsas, 2004. "How worrisome is the U.S. net foreign debt position?," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue May.
  20. Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "The U.S. Current Account and the Dollar," NBER Working Papers 11137, National Bureau of Economic Research, Inc.
  21. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, 02.
  22. Michele Cavallo & Cédric Tille, 2006. "Current account adjustment with high financial integration: a scenario analysis," Economic Review, Federal Reserve Bank of San Francisco, pages 31-45.
  23. Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers 691, Board of Governors of the Federal Reserve System (U.S.).
  24. Gian Maria Milesi-Ferretti, & Philip R. Lane, 2003. "International Financial Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp03, IIIS.
  25. Kraay, Aart & Loayza, Norman & Servén, Luis & Ventura, Jaume, 2001. "Country Portfolios," CEPR Discussion Papers 2974, C.E.P.R. Discussion Papers.
  26. repec:tcd:wpaper:tep16 is not listed on IDEAS
  27. John D. Burger & Francis E. Warnock, 2003. "Diversification, original sin, and international bond portfolios," International Finance Discussion Papers 755, Board of Governors of the Federal Reserve System (U.S.).
  28. Elekdag, Selim & Tchakarov, Ivan, 2007. "Balance sheets, exchange rate policy, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3986-4015, December.
  29. Tille, Cedric, 2001. "The role of consumption substitutability in the international transmission of monetary shocks," Journal of International Economics, Elsevier, vol. 53(2), pages 421-444, April.
  30. Obstfeld, Maurice, 2004. "External Adjustment," Center for International and Development Economics Research, Working Paper Series qt7bw468wx, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  31. Anna Pavlova & Roberto Rigobon, 2003. "Asset Prices and Exchange Rates," NBER Working Papers 9834, National Bureau of Economic Research, Inc.
  32. Charles Engel & Akito Matsumoto, 2006. "Portfolio Choice in a Monetary Open-Economy DSGE Model," NBER Working Papers 12214, National Bureau of Economic Research, Inc.
  33. Sheng-Yung Yang & Shuh-Chyi Doong, 2004. "Price and Volatility Spillovers between Stock Prices and Exchange Rates: Empirical Evidence from the G-7 Countries," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 3(2), pages 139-153, August.
  34. Vincent BODART & Paul REDING, 2001. "Do Foreign Exchange Markets Matter Dor Industry Stock Returns ? An empirical investigation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001016, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  35. Jonathan Heathcote & Fabrizio Perri, 2004. "The international diversification puzzle is not as bad as you think," 2004 Meeting Papers 152, Society for Economic Dynamics.
  36. Hau, Harald & Rey, Hélène, 2003. "Exchange Rates, Equity Prices and Capital Flows," CEPR Discussion Papers 3735, C.E.P.R. Discussion Papers.
  37. Pierpaolo Benigno, 2006. "Are Valuation Effects Desirable from a Global Perspective?," NBER Working Papers 12219, National Bureau of Economic Research, Inc.
  38. 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.
  39. Hau, Harald, 2000. "Exchange rate determination: The role of factor price rigidities and nontradeables," Journal of International Economics, Elsevier, vol. 50(2), pages 421-447, April.
  40. Kenneth A. Froot, 1993. "Currency Hedging over Long Horizons," NBER Working Papers 4355, National Bureau of Economic Research, Inc.
  41. Matthias Doepke & Martin Schneider, 2005. "Real effects of inflation through the redistribution of nominal wealth," Staff Report 355, Federal Reserve Bank of Minneapolis.
  42. Giancarlo Corsetti & Paolo Pesenti, 2001. "International Dimensions of Optimal Monetary Policy," NBER Working Papers 8230, National Bureau of Economic Research, Inc.
  43. Geert Bekaert & Robert J. Hodrick, 1991. "Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," NBER Working Papers 3790, National Bureau of Economic Research, Inc.
  44. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  45. 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).
  46. repec:rus:hseeco:124089 is not listed on IDEAS
  47. Benoît Mercereau, 2004. "The Role of Stock Markets in Current Account Dynamics; a Time-Series Approach," IMF Working Papers 04/50, International Monetary Fund.
  48. Cedric Tille, 1999. "The role of consumption substitutability in the international transmission of shocks," Staff Reports 67, Federal Reserve Bank of New York.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:inecon:v:75:y:2008:i:2:p:283-294. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.