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The Valuation Channel of External Adjustment

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Author Info
Fabio Ghironi
Jaewoo Lee
Alessandro Rebucci () (Research Department International Monetary Fund)

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Abstract

This paper explores the valuation channel of external adjustment in a two-country dynamic stochastic general equilibrium model (DSGE) with international equity trading. The theoretical model we set up matches key moments of the data for the United States at business cycle frequency at least as well as standard models of international real business cycles (RBCs). In our theoretical analysis, we find that two-asset trading is necessary for a valuation channel of external adjustment to emerge. However, other features of the economy, such as on the nature of the shock that generates the external imbalance and other features of the economy – the extent of nominal rigidity and the size of finacial frictions – determine the magnitude and significance of this channel of adjustment. The relative importance of the valuation channel is larger the higher the degree of nominal rigidity and the higher finacial intermediation costs. Monetary policy shocks have no valuation effects with flexible prices and trade only in equity. Specifying the theoretical model with net foreign assets different from zero in necessary to start matching satisfactorily empirical moments of changes in the US net foreign asset position.

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 195.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:195

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Related research
Keywords: External adjustment; Portfolio Models; Valuation Channel; SDGE Models;

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Akito Matsumoto, 2007. "The Role of Nonseparable Utility and Nontradeables in International Business Cycle and Portfolio Choice," IMF Working Papers 07/163, International Monetary Fund. [Downloadable!]
  2. Michael B. Devereux & Alan Sutherland, 2007. "Solving for Country Portfolios in Open Economy Macro Models," IMF Working Papers 07/284, International Monetary Fund. [Downloadable!]
    Other versions:
  3. Kilian, Lutz & Rebucci, Alessandro & Spatafora, Nikola, 2007. "Oil Shocks and External Balances," CEPR Discussion Papers 6303, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2007. "International Portfolios with Supply, Demand and Redistributive Shocks," CEPR Discussion Papers 6482, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Cedric Tille, 2005. "Financial integration and the wealth effect of exchange rate fluctuations," Staff Reports 226, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  6. Stephanie E. Curcuru & Tomas Dvorak & Francis Warnock, 2007. "Cross-border returns differentials," Globalization and Monetary Policy Institute Working Paper 04, Federal Reserve Bank of Dallas. [Downloadable!]
  7. Devereux, Michael B. & Sutherland, Alan, 2008. "Financial globalization and monetary policy," Discussion Paper Series 1: Economic Studies 2008,20, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  8. Sven Blank & Claudia M. Buch, 2007. "International Bank Portfolios: Short- and Long-Run Responses to the Business Cycle," IAW Discussion Papers 29, Institut für Angewandte Wirtschaftsforschung (IAW). [Downloadable!]
    Other versions:
  9. Pierpaolo Benigno, 2006. "Are Valuation Effects Desirable from a Global Perspective?," NBER Working Papers 12219, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Michael B. Devereux & Hans Genberg, 2006. "Currency Appreciation and Current Account Adjustment," Working Papers 172006, Hong Kong Institute for Monetary Research. [Downloadable!]
    Other versions:
  11. Bénétrix, Agustín S., 2007. "The Anatomy of Large Valuation Episodes," MPRA Paper 4925, University Library of Munich, Germany. [Downloadable!]
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  12. Gian Maria Milesi-Ferretti & Philip R. Lane, 2007. "Europe and Global Imbalances," IMF Working Papers 07/144, International Monetary Fund. [Downloadable!]
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