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Valuation Effects and the Dynamics of Net External Assets

  • Devereux, Michael B
  • Sutherland, Alan

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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7273.

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Date of creation: Apr 2009
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Handle: RePEc:cpr:ceprdp:7273
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  1. Coeurdacier, Nicolas, 2009. "Do trade costs in goods market lead to home bias in equities?," Journal of International Economics, Elsevier, vol. 77(1), pages 86-100, February.
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  8. Robert Kollmann & Nicolas Coeurdacier, 2008. "International Portfolios, Current Account Dynamics and Capital Accumulation," 2008 Meeting Papers 817, Society for Economic Dynamics.
  9. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  10. Michele Cavallo & Cédric Tille, 2006. "Could capital gains smooth a current account rebalancing?," Working Paper Series 2006-03, Federal Reserve Bank of San Francisco.
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  13. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
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  19. Devereux, Michael B & Sutherland, Alan, 2009. "Valuation Effects and the Dynamics of Net External Assets," CEPR Discussion Papers 7273, C.E.P.R. Discussion Papers.
  20. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
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  27. Pierre-Olivier Gourinchas, 2008. "Valuation Effects and External Adjustment: A Review," Central Banking, Analysis, and Economic Policies Book Series, in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmidt- (ed.), Current Account and External Financing, edition 1, volume 12, chapter 6, pages 195-236 Central Bank of Chile.
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  29. 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.
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  33. repec:cdl:ciders:43847 is not listed on IDEAS
  34. Michael B Devereux & Alan Sutherland, 2007. " Country Portfolio Dynamics," CDMA Conference Paper Series 0706, Centre for Dynamic Macroeconomic Analysis.
  35. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
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