Working Paper: CEPR ID: DP4745
Authors: Philip R. Lane; Gian Maria Milesi-Ferretti
Abstract: The founders of the Bretton Woods System sixty years ago were primarily concerned with orderly exchange rate adjustment in a world economy that was characterized by widespread restrictions on international capital mobility. In contrast, the rapid pace of financial globalization during recent years poses new challenges for the international monetary system. In particular, large gross cross-holdings of foreign assets and liabilities means that the valuation channel of exchange rate adjustment has grown in importance, relative to the traditional trade balance channel. Accordingly, this Paper empirically explores some of the inter-connections between financial globalization and exchange rate adjustment and discusses the policy implications.
Keywords: capital flows; external assets and liabilities; financial integration
JEL Codes: F31; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial globalization (F30) | international spillovers from asset price and currency movements (F32) |
| international spillovers from asset price and currency movements (F32) | dynamics of net foreign asset positions (F32) |
| exchange rate fluctuations (F31) | value of existing investment positions (G11) |
| valuation effects (Q51) | net foreign asset dynamics (F32) |
| exchange rate depreciation (F31) | need for real depreciation to generate trade surpluses (F14) |
| currency movements (F31) | current account dynamics (F32) |