International financial adjustment
By: Pierre-Olivier Gourinchas, Hélène Rey.
Contributors: Rey, Hélène.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11155; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11155.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: International finance -- Mathematical models.; Foreign exchange rates -- Mathematical models.; Alien property -- Mathematical models.; Economic stabilization -- Mathematical models.
Description: "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"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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