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Exchange Rates and Global Imbalances: The Importance of Asset Valuation Effects and Interest Rate Changes

  • Christian M. Oberpriller

This paper analyzes two effects which might have an important impact on a reduction of global external imbalances. These are valuation effects on the one hand and interest rate effects on the other hand. We use a four-region model that is based on the models by Obstfeld and Rogoff (2005) and Oberpriller (2007) to analyze the difference in the occurring exchange rate changes with and without valuation and interest rate effects under two different scenarios of narrowing global imbalances. The outcome is a reduced need for real dollar depreciation because the United States will largely benefit from valuation gains on their foreign assets while the effect that stems from interest rate changes works in the opposite direction but is not as strong as the valuation effect. The magnitude of valuation and interest rate effects reduce the need for real exchange rate depreciation by two to four percentage points.

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File URL: https://www.ifw-kiel.de/ausbildung/asp/asp-wp/2007/aspwp443.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Advanced Studies Working Papers with number 443.

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Length: 19 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:kie:kieasw:443
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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. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International Financial Adjustment," International Finance 0505004, EconWPA.
  3. Michele Cavallo & Cédric Tille, 2006. "Could capital gains smooth a current account rebalancing?," Working Paper Series 2006-03, Federal Reserve Bank of San Francisco.
  4. 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).
  5. Christian M. Oberpriller, 2007. "Global Current Account Imbalances and Exchange Rate Adjustment: The Role of Oil Suppliers Valuation Effects and Interest Rate Changes," Kiel Advanced Studies Working Papers 442, Kiel Institute for the World Economy.
  6. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2005. "Interest Rates, Exchange Rates and International Adjustment," NBER Working Papers 11771, National Bureau of Economic Research, Inc.
  7. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3993, May.
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