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International Financial Adjustment

Pierre-Olivier Gourinchas and Helene Rey

International Finance from University Library of Munich, Germany

Abstract: 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.

Keywords: Meese-Rogoff; external adjustment; net foreign assets; valuation effects; exchange rates (search for similar items in EconPapers)
JEL-codes: F31 F32 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2005-05-05
New Economics Papers: this item is included in nep-ifn
Note: Type of Document - pdf; pages: 47
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (135)

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https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0505/0505004.pdf (application/pdf)

Related works:
Journal Article: International Financial Adjustment (2007) Downloads
Journal Article: International financial adjustment (2005) Downloads
Working Paper: International Financial Adjustment (2005) Downloads
Working Paper: International Financial Adjustment (2005) Downloads
Working Paper: International Financial Adjustment (2005) Downloads
Working Paper: International Financial Adjustment (2005) Downloads
Working Paper: International Financial Adjustment (2005) Downloads
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