Working Paper: CEPR ID: DP6473
Authors: Philip R. Lane; Jay C. Shambaugh
Abstract: Our goal in this project is to gain a better empirical understanding of the international financial implications of currency movements. To this end, we construct a database of international currency exposures for a large panel of countries over 1990-2004. We show that trade-weighted exchange rate indices are insufficient to understand the financial impact of currency movements. Further, we demonstrate that many developing countries hold short foreign-currency positions, leaving them open to negative valuation effects when the domestic currency depreciates. However, we also show that many of these countries have substantially reduced their foreign currency exposure over the last decade. Last, we show that our currency measure has high explanatory power for the valuation term in net foreign asset dynamics: exchange rate valuation shocks are sizable, not quickly reversed and may entail substantial wealth shocks.
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 |
|---|---|
| exchange rate movements (F31) | valuation of international balance sheets (F30) |
| unexpected depreciation of currencies (F31) | wealth losses for countries with significant foreign-currency liabilities (F65) |
| exchange rate valuation shocks (F31) | influence on net foreign asset dynamics (F32) |
| increasing share of liabilities in local currency (F65) | improved positions for many countries (O57) |
| currency movements (F31) | optimal policy design (E61) |