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Financial exchange rates and international currency exposures

In: Research on global financial stability: the use of BIS international financial statistics

  • Philip R Lane

    (IIIS, Trinity College Dublin and CEPR)

  • Jay C Shambaugh

    (Dartmouth College and NBER)

Our goal in this project is to gain a better empirical understanding of the international financial implications of currency movements. To this end, 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. Further, we demonstrate that many developing countries hold short foreign-currency positions, leaving them open to negative valuation effects when the domestic currency depreciates. However, we also show that many of these countries have substantially reduced their foreign currency exposure over the last decade. Last, we show that our currency measure has 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 shocks.

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This chapter was published in:
  • Bank for International Settlements, 2007. "Research on global financial stability: the use of BIS international financial statistics," CGFS Papers, Bank for International Settlements, number 29, Autumn.
  • This item is provided by Bank for International Settlements in its series CGFS Papers chapters with number 29-06.
    Handle: RePEc:bis:biscgc:29-06
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    1. 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.
    2. Harald Hau & Helene Rey, 2002. "Exchange Rate, Equity Prices and Capital Flows," NBER Working Papers 9398, National Bureau of Economic Research, Inc.
    3. Anna Pavlova & Roberto Rigobon, 2007. "Asset Prices and Exchange Rates," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1139-1180.
    4. Philip R. Lane and Jay C. Shambaugh, 2008. "The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets," The Institute for International Integration Studies Discussion Paper Series iiisdp253, IIIS.
    5. Caballero, Ricardo J. & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," Scholarly Articles 3229094, Harvard University Department of Economics.
    6. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege," CEPREMAP Working Papers (Docweb) 0606, CEPREMAP.
    7. Richard Portes & Helene Rey, 2000. "The determinants of cross-border equity flows," LSE Research Online Documents on Economics 20203, London School of Economics and Political Science, LSE Library.
    8. 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.
    9. Maurico Obstfeld, 2004. "External adjustment," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(4), pages 541-568, December.
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    11. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2003. "International Financial Integration," CEPR Discussion Papers 3769, C.E.P.R. Discussion Papers.
    12. Devereux, Michael B & Saito, Makoto, 2006. "A Portfolio Theory of International Capital Flows," CEPR Discussion Papers 5746, C.E.P.R. Discussion Papers.
    13. Viceira, Luis & Serfaty-de Medeiros, Karine & Campbell, John, 2009. "Global Currency Hedging," Scholarly Articles 3153308, Harvard University Department of Economics.
    14. Philippe Martin & H=E9l=E8ne Rey=, 2001. "Financial Super-Markets: Size Matters for Asset Trade," International Finance 0012001, EconWPA.
    15. 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).
    16. André Faria & Philip R. Lane & Paolo Mauro & Gian Maria Milesi-Ferretti, 2007. "The Shifting Composition of External Liabilities," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 480-490, 04-05.
    17. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2004. "Financial Globalization and Exchange Rates," CEPR Discussion Papers 4745, C.E.P.R. Discussion Papers.
    18. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 300-351, February.
    19. Burnside, Craig & Eichenbaum, Martin & Kleshchelski, Isaac & Rebelo, Sérgio, 2006. "The Returns to Currency Speculation," CEPR Discussion Papers 5883, C.E.P.R. Discussion Papers.
    20. Francis E. Warnock, 2006. "How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?," IMF Working Papers 06/170, International Monetary Fund.
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    22. Anna Wong, 2007. "Measurement and Inference in International Reserve Diversification," Working Paper Series WP07-6, Peterson Institute for International Economics.
    23. Enrique G. Mendoza, 2007. "Financial Integration, Financial Deepness and Global Imbalance," 2007 Meeting Papers 746, Society for Economic Dynamics.
    24. Devereux, Michael B & Lane, Philip R., 2002. "Understanding Bilateral Exchange Rate Volatility," CEPR Discussion Papers 3518, C.E.P.R. Discussion Papers.
    25. Philippe Martin & Helene Rey, 2004. "Financial Super-Markets: Size Matters for Asset Trade," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00176904, HAL.
    26. Akito Matsumoto & Charles Engel, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund.
    27. Devereux, Michael B & Sutherland, Alan, 2006. "Solving for Country Portfolios in Open Economy Macro Models," CEPR Discussion Papers 5966, C.E.P.R. Discussion Papers.
    28. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
    29. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
    30. Michael B. Devereux & Alan Sutherland, 2008. "Country portfolios in open economy macro models," Globalization and Monetary Policy Institute Working Paper 09, Federal Reserve Bank of Dallas.
    31. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    32. 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.
    33. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373.
    34. Chris Becker & Daniel Fabbro, 2006. "Limiting Foreign Exchange Exposure through Hedging: The Australian Experience," RBA Research Discussion Papers rdp2006-09, Reserve Bank of Australia.
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