EconPapers    
Economics at your fingertips  
 

The Valuation Channel of External Adjustment

Fabio Ghironi, Alessandro Rebucci () and Jaewoo Lee

No 10564, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: International financial integration has greatly increased the scope for changes in a country?s net foreign asset position through the ?valuation channel? of external adjustment, namely capital gains and losses on the country?s external assets and liabilities. We examine this valuation channel theoretically in a dynamic equilibrium portfolio model with international trade in equity that encompasses complete and incomplete asset market scenarios. By separating asset prices and quantities in the definition of net foreign assets, we can characterize the first-order dynamics of both valuation effects and net foreign equity holdings. First-order excess returns are unanticipated and i.i.d. in our model, but capital gains and losses on equity positions feature persistent, anticipated dynamics in response to productivity shocks. The separation of prices and quantities in net foreign assets also enables us to characterize fully the role of capital gains and losses versus the current account in the dynamics of macroeconomic aggregates. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete, showing how these different channels contribute to dampening (or amplifying) the impact response of the cross-country consumption differential to shocks and to keeping it constant in subsequent periods.

Keywords: Current account; Equity; Net foreign assets; Risk sharing; Valuation (search for similar items in EconPapers)
JEL-codes: F32 F41 G11 G15 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

Downloads: (external link)
https://cepr.org/publications/DP10564 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The valuation channel of external adjustment (2015) Downloads
Working Paper: The Valuation Channel of External Adjustment (2009) Downloads
Working Paper: The valuation channel of external adjustment (2009) Downloads
Working Paper: The Valuation Channel of External Adjustment (2009) Downloads
Working Paper: The Valuation Channel of External Adjustment (2007) Downloads
Working Paper: The Valuation Channel of External Adjustment (2006) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10564

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10564

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-19
Handle: RePEc:cpr:ceprdp:10564