The Valuation Channel of External Adjustment

By Fabio Ghironi, Jaewoo Lee, Alessandro Rebucci. Social Science Research Network, 2009

119 citations recorded by the source corpus.

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.

Subfields: Finance, General Decision Sciences, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/0762666a4c86d622bf36e8d6a2fd2760be24ee54

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Citations in the corpus

Financial Globalization and Monetary Policy (2007, background): “and Hnatkovska (2005), and Kollmann (2006). Engel and Matsumoto (2006) incorporate endogenous portfolio choice into a complete markets version of a sticky-price open economy macro model, focusing on the ‘home equity bias’ puzzle.”
The Role of Portfolio Constraints in the International Propagation of Shocks (2008, background): “For other recent attempts to break the financial market structure irrelevancy result, see Engel and Matsumoto (2006), Ghironi, Lee, and Rebucci (2006) , Pavlova and Rigobon (2007), Serrat (2001), and Soumare and Wang (2007).”
Global Exchange Rate Configurations: Do Oil Shocks Matter? (2016, unknown): “In the context of greater financial integration, valuation effects become more important for the sustainability of net foreign assets (Ghironi, Lee, and Rebucci, 2007; and Gourinchas and Rey, 2007).”
COUNTRY PORTFOLIOS IN OPEN ECONOMY MACRO‐MODELS (2011, unknown): “¸ = O i � 3 ¢ ( 13 ) tends towards a limit which correspond to one of the many equilibria in the non-stochastic world.”
Solving for Country Portfolios in Open Economy Macro Models (2007, background): “The home and foreign optimality conditions, (9) and ( 10 ), can be combined to show”
A method for solving general equilibrium models with incomplete markets and many financial assets (2012, unknown): “Given our formulation in (18) and ( 19 ), a solution to the model is characterized by a decision rule for”
Valuation Effects and the Dynamics of Net External Assets (2009, unknown): “Et [u (Ct+1)r1,t+1] = Et [u (Ct+1)r2,t+1] (15)”