| Author/Presenter |
Michael Devereux (University of British Columbia) |
| Co-author |
Alan Sutherland (University of St. Andrews) |
| Title |
Valuation Effects And The Dynamics Of Net External Assets |
| Abstract |
Recent evidence on the pattern of capital flows and net external imbalances in the US and other countries underscores the importance of the portfolio composition of external assets and liabilities. In the presence of asymmetries in the currency composition or maturity structure of assets and liabilities, movements in exchange rates and asset prices can generate large changes in net external assets, easily as large as total annual trade balances. Yet most of the theoretical and empirical work on the current account has ignored portfolio composition entirely in assessing the current account sustainability and the implications of external imbalances. This paper makes use of recent developments in portfolio choice in dynamic general equilibrium environments to examine the sustainability of external imbalances in the context of differences in composition of gross external assets and liabilities. We first develop a theoretical template within which we can analyze the recent data on international investment positions. We then apply this model to an analysis of valuation effects of exchange rates on the US exernal position. We find that the model can explain the direction of recent valuation effects, but when calibrated to match observed portfolio positions, fails to explain the quantitative magnitude of the effects. We explore a number of extended formulations of the model which may provide a better quantitative accounting of valuation effects in external imbalances. |
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