Valuation effects with transitory and trend productivity shocks

Ha Nguyen
Authors registered in the RePEc Author Service: Ha Nguyen and Nguyen Phu Ha ()

Journal of International Economics, 2011, vol. 85, issue 2, 245-255

Abstract: Changes in asset prices of a country's foreign assets and liabilities (“valuation effects”) are commonly thought of as stabilizing: they counteract current account movements and mitigate the impact of the current account on the country's net foreign asset (NFA) position. This paper shows that whether valuation effects are stabilizing or not depends critically on the nature of the underlying productivity shocks. In response to transitory shocks, valuation effects are stabilizing; but in response to trend shocks, such effects amplify the impact of the current account on NFA position. These contrasting effects arise because optimally smoothing consumers respond differently to a transitory shock than to a trend shock to income. This theoretical result finds empirical support with G7 countries' data, and is illustrated by the pattern of external imbalances between the U.S. and other G7 countries since the 1990s.

Keywords: Valuation effects; Current account; External imbalances; Net foreign assets (search for similar items in EconPapers)
JEL-codes: C68 F32 F41 G11 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Working Paper: Valuation effects with transitory and trend productivity shocks (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:85:y:2011:i:2:p:245-255

DOI: 10.1016/j.jinteco.2011.06.005

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