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International Financial Adjustment

  • Helene Rey
  • Pierre Olivier Gourinchas

We explore the implications of a country's external constraint for the dynamics of net foreign assets, returns, and exchange rates. Deteriorations in external accounts imply future trade surpluses (trade channel) or excess returns on the net foreign portfolio (valuation channel). Using a new data set on U.S. gross external positions, we find that stabilizing valuation effects contribute 27 percent of the cyclical external adjustment. Our approach has asset-pricing implications: external imbalances predict net foreign portfolio returns one quarter to two years ahead and net export growth at longer horizons. The exchange rate is forecastable in and out of sample at one quarter and beyond. (c) 2007 by The University of Chicago. All rights reserved.

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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 169.

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Date of creation: 2005
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Handle: RePEc:red:sed005:169
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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