The Valuation Channel of External Adjustment

Fabio Ghironi (), Jaewoo Lee () and Alessandro Rebucci ()

No 12937, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Ongoing international financial integration has greatly increased foreign asset holdings across countries, enhancing the scope for a "valuation channel" of external adjustment (i.e., the changes in a country's net foreign asset position due to exchange rate and asset price changes). We examine this channel of adjustment in a dynamic stochastic general equilibrium model with international equity trading in incomplete asset markets. We show that the risk-sharing properties of international equity trading are tied to the distribution of income between labor income and profits when equities are defined as claims to firm profits in a production economy. For a given level of international financial integration (measured by the size of gross foreign asset positions), the quantitative importance of the valuation channel of external adjustment depends on features of the international transmission mechanism such as the size of financial frictions, substitutability across goods, and the persistence of shocks. Finally, moving from less to more international financial integration, risk sharing through asset markets increases, and valuation changes are larger, but their relative importance in net foreign asset dynamics is smaller.

JEL-codes: F32 F41 G11 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-dge
Date: 2007-02
Note: IFM
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Related works:
Working Paper: The Valuation Channel of External Adjustment (2006)
Working Paper: The Valuation Channel of External Adjustment (2009)
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