Working Paper: CEPR ID: DP6887
Authors: Philip R. Lane; Jay C. Shambaugh
Abstract: Recently, there have been numerous advances in modelling optimal international portfolio allocations in macroeconomic models. A major focus of this literature has been on the role of currency movements in determining portfolio returns that may hedge various macroeconomic shocks. However, there is little empirical evidence on the foreign currency exposures that are embedded in international balance sheets. Using a new database, we provide stylized facts concerning the cross-country and time-series variation in aggregate foreign currency exposure and its various subcomponents. In panel estimation, we find that richer, more open economies take longer foreign-currency positions. In addition, we find that an increase in the propensity for a currency to depreciate during bad times is associated with a longer position in foreign currencies, providing a hedge against domestic output fluctuations. We view these new stylized facts as informative in their own right and also potentially useful to the burgeoning theoretical literature on the macroeconomics of international portfolios.
Keywords: exchange rates; financial globalization; international portfolios
JEL Codes: F31; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| richer economies (P19) | longer foreign currency positions (F31) |
| more open economies (F43) | longer foreign currency positions (F31) |
| increase in currency depreciation propensity during downturns (F31) | longer foreign currency positions (F31) |
| longer foreign currency positions (F31) | hedge against domestic output fluctuations (F44) |
| higher currency depreciation risk (F31) | hold foreign currency assets (G15) |