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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, April.
  • 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. John Y. Campbell & Karine Serfaty-De Medeiros & Luis M. Viceira, 2010. "Global Currency Hedging," Journal of Finance, American Finance Association, vol. 65(1), pages 87-121, 02.
    2. Philip R. Lane & Jay C. Shambaugh, 2009. "The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets," NBER Working Papers 14909, National Bureau of Economic Research, Inc.
    3. Craig Burnside & Martin Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2006. "The Returns to Currency Speculation," 2006 Meeting Papers 864, Society for Economic Dynamics.
    4. Ceyhun Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism," NBER Working Papers 13123, National Bureau of Economic Research, Inc.
    5. Devereux, Michael B & Lane, Philip R., 2002. "Understanding Bilateral Exchange Rate Volatility," CEPR Discussion Papers 3518, C.E.P.R. Discussion Papers.
    6. 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.
    7. Caballero, Ricardo J & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," Center for International and Development Economics Research, Working Paper Series qt7xc0g8mm, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    8. 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.
    9. Roberto Rigobon & Anna Pavlova, 2004. "Asset Prices and Exchange Rates," Econometric Society 2004 North American Winter Meetings 579, Econometric Society.
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    11. Martin, Philippe & Rey, Hélène, 2000. "Financial Super-Markets: Size Matters for Asset Trade," Center for International and Development Economics Research, Working Paper Series qt0dr2z6p9, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    12. Michael B. Devereux & Alan Sutherland, 2007. "Solving for Country Portfolios in Open Economy Macro Models," Working Papers 162007, Hong Kong Institute for Monetary Research.
    13. Akito Matsumoto & Charles Engel, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund.
    14. Tille, Cédric & van Wincoop, Eric, 2008. "International Capital Flows," CEPR Discussion Papers 6705, C.E.P.R. Discussion Papers.
    15. 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.
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    17. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," The Institute for International Integration Studies Discussion Paper Series iiisdp124, IIIS.
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    19. 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.
    20. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2004. "Financial Globalization and Exchange Rates," CEPR Discussion Papers 4745, C.E.P.R. Discussion Papers.
    21. Mendoza, Enrique G & Quadrini, Vincenzo & Ríos-Rull, José-Víctor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers 6149, C.E.P.R. Discussion Papers.
    22. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
    23. 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.
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    26. 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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    28. 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.
    29. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
    30. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373, May.
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    32. Chris Becker & Daniel Fabbro, 2006. "Limiting Foreign Exchange Exposure through Hedging: The Australian Experience," RBA Research Discussion Papers rdp2006-09, Reserve Bank of Australia.
    33. Anna Wong, 2007. "Measurement and Inference in International Reserve Diversification," Working Paper Series WP07-6, Peterson Institute for International Economics.
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