Working Paper: CEPR ID: DP7273
Authors: Michael B. Devereux; Alan Sutherland
Abstract: The traditional current account can be an inaccurate measure of the change in the net foreign asset (NFA) position. Using gross asset and liability positions at the country level, a number of 'valuation effects' have been identified which contribute to changes in NFA but do not enter the reported current account. This paper uses new developments in the analysis of portfolio allocation in general equilibrium to investigate valuation effects in a two-country model. The model can be used to analyze both qualitatively and quantitatively the role of valuation effects. Broadly speaking, the valuation effects in the model correspond to those in the data, and have the effect of enhancing cross country risk sharing. But there is a key distinction between 'unanticipated' and 'anticipated' valuation effects. Unanticipated effects can be large, dominating the movement in NFA, but anticipated effects arise only at higher orders of approximation and are small for reasonable parameterisations. The paper also analyses the determinants of international portfolio positions, and their role in generating valuation effects from asset price and terms of trade changes.
Keywords: country portfolios; net foreign asset dynamics; valuation effects
JEL Codes: F32; F37; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| valuation effects (Q51) | changes in net foreign assets (NFA) (F32) |
| unanticipated valuation effects (G19) | changes in net foreign assets (NFA) (F32) |
| traditional current accounts (F32) | changes in net foreign assets (NFA) (F32) |
| asset price changes (G19) | valuation effects (Q51) |
| valuation effects (Q51) | cross-country risk sharing (F34) |