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The shock absorbing role of cross-border investments: net positions versus currency composition

Author

Listed:
  • Agustin S. Benetrix

    (Department of Economics, Trinity College Dublin)

  • Beren Demirolmez

    (Department of Economics, Trinity College Dublin)

  • Martin Schmitz

    (European Central Bank)

Abstract

We present a comprehensive analysis of the shock absorption role of external positions using the currency exposures dataset by Bénétrix, Gautam, Juvenal, and Schmitz (2020). While the literature has frequently studied how the net international investment position and its currency composition determine the direction and scale of valuation effects, we focus on their amplitude. This is of central importance for global financial stability given the large and increasing scale of external balance sheets. To that end, we propose an indicator showing the extent to which external positions absorb or amplify exchange rate shocks. Analysing a set of 50 countries over the period 1990-2017, we find the external shock absorption role to be present for advanced economies, while this was initially not the case for emerging markets economies (EMEs). In recent years, however, EMEs' external positions increasingly showed a shock absorption capacity. Our regression-based analysis reveals that the level of economic and financial development is associated with a greater capacity to absorb exchange rate shocks.

Suggested Citation

  • Agustin S. Benetrix & Beren Demirolmez & Martin Schmitz, 2021. "The shock absorbing role of cross-border investments: net positions versus currency composition," Trinity Economics Papers tep0421, Trinity College Dublin, Department of Economics.
  • Handle: RePEc:tcd:tcduee:tep0421
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    More about this item

    Keywords

    Currency composition; international investment position; foreign currency exposures; valuation effects; global imbalances;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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