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 effec...
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| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2010/01/11640417/valuation-effects-transitory-trend-productivity-shocks http://hdl.handle.net/10986/19945 |
| Summary: | 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. |
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