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International Financial Adjustment

  • Pierre-Olivier Gourinchas

    (Economics Department, University of California, Berkeley)

  • Hélène Rey

    (Department of Economics & Woodrow Wilson School,, Princeton University)

The paper proposes a unified framework to study the dynamics of net foreign assets and exchange rate movements. We show that deteriorations in a country's net exports or net foreign asset position have to be matched either by future net export growth (trade adjustment channel) or by future increases in the returns of the net foreign asset portfolio (hitherto unexplored financial adjustment channel). Using a newly constructed data set on US gross foreign positions, we find that stabilizing valuation effects contribute as much as 31% of the external adjustment. Our theory also has asset pricing implications. Deviations from trend of the ratio of net exports to net foreign assets predict net foreign asset portfolio returns one quarter to two years ahead and net exports at longer horizons. The exchange rate affects the trade balance and the valuation of net foreign assets. It is forecastable in and out of sample at one quarter and beyond. A one standard deviation decrease of the ratio of net exports to net foreign assets predicts an annualized 4% depreciation of the exchange rate over the next quarter.

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File URL: http://128.118.178.162/eps/if/papers/0505/0505004.pdf
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Paper provided by EconWPA in its series International Finance with number 0505004.

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Length: 47 pages
Date of creation: 05 May 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0505004
Note: Type of Document - pdf; pages: 47
Contact details of provider: Web page: http://128.118.178.162

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  25. Kraay, A. & Ventura, J., 1997. "Current Acounts in Debtor and Creditor Countries," Working papers 97-12, Massachusetts Institute of Technology (MIT), Department of Economics.
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