The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets

Philip Lane and Jay Shambaugh

No 6887, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Recently, there have been numerous advances in modelling optimal international portfolio allocations in macroeconomic models. A major focus of this literature has been on the role of currency movements in determining portfolio returns that may hedge various macroeconomic shocks. However, there is little empirical evidence on the foreign currency exposures that are embedded in international balance sheets. Using a new database, we provide stylized facts concerning the cross-country and time-series variation in aggregate foreign currency exposure and its various subcomponents. In panel estimation, we find that richer, more open economies take longer foreign-currency positions. In addition, we find that an increase in the propensity for a currency to depreciate during bad times is associated with a longer position in foreign currencies, providing a hedge against domestic output fluctuations. We view these new stylized facts as informative in their own right and also potentially useful to the burgeoning theoretical literature on the macroeconomics of international portfolios.

Keywords: Exchange rates; Financial globalization; International portfolios (search for similar items in EconPapers)
JEL-codes: F31 F32 (search for similar items in EconPapers)
Date: 2008-06
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: The long or short of it: Determinants of foreign currency exposure in external balance sheets (2010)
Working Paper: The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets (2009)
Working Paper: The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets (2008)
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