The Valuation Channel of External Adjustment

50 Pages Posted: 24 Feb 2007 Last revised: 7 Nov 2022

See all articles by Fabio Pietro Ghironi

Fabio Pietro Ghironi

University of Washington

Jaewoo Lee

International Monetary Fund (IMF) - Research Department

Alessandro Rebucci

Johns Hopkins University - Carey Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2007

Abstract

Ongoing international financial integration has greatly increased foreign asset holdings across countries, enhancing the scope for a "valuation channel" of external adjustment (i.e., the changes in a country's net foreign asset position due to exchange rate and asset price changes). We examine this channel of adjustment in a dynamic stochastic general equilibrium model with international equity trading in incomplete asset markets. We show that the risk-sharing properties of international equity trading are tied to the distribution of income between labor income and profits when equities are defined as claims to firm profits in a production economy. For a given level of international financial integration (measured by the size of gross foreign asset positions), the quantitative importance of the valuation channel of external adjustment depends on features of the international transmission mechanism such as the size of financial frictions, substitutability across goods, and the persistence of shocks. Finally, moving from less to more international financial integration, risk sharing through asset markets increases, and valuation changes are larger, but their relative importance in net foreign asset dynamics is smaller.

Suggested Citation

Ghironi, Fabio Pietro and Lee, Jaewoo and Rebucci, Alessandro, The Valuation Channel of External Adjustment (February 2007). NBER Working Paper No. w12937, Available at SSRN: https://ssrn.com/abstract=965129

Fabio Pietro Ghironi (Contact Author)

University of Washington ( email )

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HOME PAGE: http://faculty.washington.edu/ghiro

Jaewoo Lee

International Monetary Fund (IMF) - Research Department ( email )

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Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

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HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

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National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

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