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Financial Exchange Rates and International Currency Exposures

  • Philip R. Lane
  • Jay C. Shambaugh

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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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp229.

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Date of creation: 12 Sep 2007
Handle: RePEc:iis:dispap:iiisdp229
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  1. 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.
  2. 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.
  3. Ceyhun Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, 2007. "Precautionary demand for foreign assets in sudden stop economies: an assessment of the new mercantilism," International Finance Discussion Papers 911, Board of Governors of the Federal Reserve System (U.S.).
  4. Philip R. Lane & G.M. Milesi-Ferretti, 2003. "International Financial Integration," Trinity Economics Papers 20031, Trinity College Dublin, Department of Economics.
  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. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," Working Papers 112006, Hong Kong Institute for Monetary Research.
  7. 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.
  8. P Martin & H Rey, 2000. "Financial Super-Markets: Size Matters for Asset Trade," CEP Discussion Papers dp0450, Centre for Economic Performance, LSE.
  9. 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.
  10. Philip R. Lane & Gian Maria Milesi-Ferretti, 2005. "Financial Globalisation and Exchange Rates," The Institute for International Integration Studies Discussion Paper Series iiisdp044, IIIS.
  11. Michael B. Devereux & Alan Sutherland, 2007. "Solving for Country Portfolios in Open Economy Macro Models," Working Papers 162007, Hong Kong Institute for Monetary Research.
  12. Anna Wong, 2007. "Measurement and Inference in International Reserve Diversification," Working Paper Series WP07-6, Peterson Institute for International Economics.
  13. Burnside, Craig & Eichenbaum, Martin & Kleshchelski, Isaac & Rebelo, Sérgio, 2006. "The Returns to Currency Speculation," CEPR Discussion Papers 5883, C.E.P.R. Discussion Papers.
  14. Michael B. Devereux & Alan Sutherland, 2011. "Country Portfolios In Open Economy Macro‐Models," Journal of the European Economic Association, European Economic Association, vol. 9(2), pages 337-369, 04.
  15. Maurico Obstfeld, 2004. "External adjustment," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 140(4), pages 541-568, December.
  16. Francis E. Warnock, 2006. "How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?," IMF Working Papers 06/170, International Monetary Fund.
  17. 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.
  18. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, vol. 80(2), pages 157-175, March.
  19. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
  20. Michael B. Devereux & Philip R. Lane, 2000. "Exchange Rates and Monetary Policy in Emerging Market Economies," Working Papers 072000, Hong Kong Institute for Monetary Research.
  21. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
  22. Anna Pavlova & Roberto Rigobon, 2003. "Asset Prices and Exchange Rates," NBER Working Papers 9834, National Bureau of Economic Research, Inc.
  23. 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.
  24. Devereux, Michael B & Lane, Philip R., 2002. "Understanding Bilateral Exchange Rate Volatility," CEPR Discussion Papers 3518, C.E.P.R. Discussion Papers.
  25. Akito Matsumoto & Charles Engel, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund.
  26. Harald Hau & Helene Rey, 2002. "Exchange Rate, Equity Prices and Capital Flows," NBER Working Papers 9398, National Bureau of Economic Research, Inc.
  27. 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.
  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. 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.
  30. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373, January.
  31. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  32. 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).
  33. 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.
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