Valuation Effects with Transitory and Trend Productivity Shocks

In the past two decades, cross-border portfolio holdings of a large variety of assets have risen sharply. This has created an important role for changes in asset prices of a country's external assets and liabilities (i.e. "valuation effects") in affecting the country's net foreign asset position. Valuation effects are commonly thought as stabilizing: they counteract current account movements and mitigate the impact of the current account on the country's net foreign asset position. This paper shows that whether valuation effects are stabilizing or not depends critically on the nature of underlying productivity shocks. In response to transitory shocks, valuation effects are stabilizing; but in response to trend shocks, such effects amplify the impact of the current account on the net foreign asset position. These contrasting results arise because optimally smoothing consumers respond differently to a transitory shock than to a trend shock to income. The results are consistent with the pattern of external imbalances between the United States and other G.7 countries since the 1990s.

Bibliographic Details

Main Author:	Nguyen, Ha
Format:	Policy Research Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2010-01
Subjects:	ADJUSTMENT COST, ADJUSTMENT COST PARAMETER, ADJUSTMENT COSTS, ANNUAL GROWTH, ASSET HOLDING, ASSET POSITION, ASSET PRICE, ASSET PRICES, BALANCE OF PAYMENTS, BOND, BONDS, BUDGET CONSTRAINT, BUDGET CONSTRAINTS, BUSINESS CYCLE, BUSINESS CYCLES, CAPITAL FLOWS, CAPITAL GAIN, CAPITAL GAINS, CAPITAL SHARE, CAPITAL STOCK, COMMUNICATION TECHNOLOGY, CONSUMERS, CONSUMPTION GOOD, CONSUMPTION GROWTH, CONSUMPTION SMOOTHING, CREDIT MARKET, CROSS-BORDER SECURITIES, CURRENCY, CURRENT ACCOUNT, CURRENT ACCOUNT BALANCE, CURRENT ACCOUNT DEFICIT, CURRENT ACCOUNT DEFICITS, CURRENT ACCOUNT SURPLUS, DEPRECIATION, DEPRECIATION RATE, DEVELOPMENT ECONOMICS, DIVIDEND, DIVIDEND PAYMENT, DIVIDEND PAYMENTS, DIVIDEND YIELD, DIVIDENDS, DOMESTIC ECONOMY, DOMESTIC EQUITY, ECONOMIC ANALYSIS, ECONOMIC GROWTH, ECONOMIC RESEARCH, ECONOMIC THEORY, ELASTICITY, EMERGING MARKET, EMERGING MARKET BUSINESS, EMERGING MARKETS, EQUILIBRIUM, EQUITY HOLDINGS, EQUITY PORTFOLIOS, EQUITY PRICES, EXCESS RETURN, EXCHANGE RATE, EXCHANGE RATE FLUCTUATIONS, EXCHANGE RATE MOVEMENTS, EXCHANGE RATES, EXCHANGE-RATE, EXTERNAL ASSETS, FEDERAL RESERVE, FEDERAL RESERVE SYSTEM, FINANCIAL ASSETS, FINANCIAL INTEGRATION, FINANCIAL MARKETS, FOREIGN ASSET, FOREIGN ASSET POSITION, FOREIGN ASSETS, FOREIGN EQUITIES, FOREIGN EQUITY, FOREIGN EXCHANGE, FOREIGN EXCHANGE RATES, FOREIGN FIRMS, FOREIGN INVESTMENT, FOREIGN INVESTORS, FUTURE RESEARCH, GDP, GENERAL EQUILIBRIUM, GENERAL EQUILIBRIUM MODEL, GENERAL EQUILIBRIUM MODELS, GLOBAL CURRENT ACCOUNT IMBALANCES, GLOBAL IMBALANCES, GLOBALIZATION, GROWTH RATE, GROWTH ¯ RATE, HOME COUNTRY, HOST COUNTRY, IMBALANCES, INCOMPLETE MARKETS, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL FLOWS, INTERNATIONAL DIVERSIFICATION, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCE, INTERNATIONAL MONEY, INTERNATIONAL PORTFOLIO, INTERNATIONAL PORTFOLIOS, INTERNATIONAL TRANSACTIONS, INVESTING, LABOR COSTS, LABOR DEMAND, LABOR SUPPLY, LOCAL ECONOMY, LOCAL MARKET, LOW INTEREST RATES, MACROECONOMICS, MARGINAL UTILITY, MARKET ACCESS, MARKET STRUCTURES, MONETARY ECONOMICS, OPEN ECONOMY, OUTPUT, OUTPUT RATIO, PERISHABLE GOOD, PERMANENT INCOME, PERSISTENT CURRENT ACCOUNT DEFICITS, POLITICAL ECONOMY, PORTFOLIO, PORTFOLIO CHOICE, PORTFOLIO CHOICES, PORTFOLIO HOLDING, PORTFOLIO HOLDINGS, PORTFOLIOS, PRICE INDEX, PRICE RATIO, PRODUCTIVITY, PRODUCTIVITY GROWTH, PURCHASING POWER, PURCHASING POWER PARITY, REAL ASSET, RETURN, RETURNS, RISK AVERSION, SECURITIES, SHARE OF WORLD OUTPUT, SHAREHOLDERS, SHOCK TO INCOME, STANDARD DEVIATION, STANDARD DEVIATIONS, STEADY STATE, STOCK PRICE, STOCK PRICES, STOCKS, TOTAL FACTOR PRODUCTIVITY, TRADE BALANCE, TRADING, TURNOVER, VALUATION, VALUATION CHANGES, VOLATILITY, WAGES, WEALTH,
Online Access:	http://documents.worldbank.org/curated/en/2010/01/11640417/valuation-effects-transitory-trend-productivity-shocks http://hdl.handle.net/10986/19945
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