Working Paper: NBER ID: w12219
Authors: Pierpaolo Benigno
Abstract: Recent studies have emphasized the role of valuation effects due to exchange rate movements in easing the process of adjustment of the external balance of a country. This paper asks to what extent valuation effects are desirable from a global perspective as a mean to achieve an efficient allocation of resources. In a frictionless world, it is desirable to have large movements in prices and exchange rates. But once a small concern for price stability is introduced not only should prices be stabilized but also the response of the exchange rate should be muted. There is a minor role for valuation effects that depends both on the size and composition of assets and liabilities.
Keywords: Valuation Effects; Exchange Rates; Global Welfare; Resource Allocation
JEL Codes: F32; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate movements (F31) | net foreign asset position (F32) |
| valuation effects due to exchange rate movements (F31) | efficient allocation of resources (D61) |
| price stability concerns (E31) | desirability of valuation effects (G40) |
| price rigidity (D41) | impact of exchange rates on resource allocation (F31) |