Working Paper: NBER ID: w29277
Authors: Galina Hale; Luciana Juvenal
Abstract: At the onset of the COVID-19 economic crisis, as in other crisis episodes, the flight to safety was accompanied by a rapid appreciation of “safe haven” currencies. We quantify currency-induced balance sheet effects for total external positions as well as for individual asset classes using new data on the currency composition of cross-border stocks for 48 countries for the first quarter as well as for the full year 2020. We also conduct the stock-flow reconciliation of net international investment positions to measure overall valuation effects. We show that for many countries currency-induced valuation gains mitigated losses that resulted from declining asset prices in the first quarter of 2020. Moreover, for countries with excess capital out flows during this period, the impact on external balance sheet positions was mitigated by valuation gains. This is because, in contrast with past financial crises, many emerging markets did not experience negative external balance sheet effects from their currency depreciation, partly due to currency-induced valuation gains on equity positions offsetting losses on debt positions, partly due to reduced currency mismatch on their external debt positions.
Keywords: COVID-19; currency-induced valuation effects; external balance sheets
JEL Codes: F32; F34; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Currency appreciation (F31) | Improved external balance sheet positions (G32) |
| Currency-induced valuation gains (F31) | Mitigated losses from declining asset prices (G19) |
| Excess capital outflows (F32) | Valuation gains that offset losses on external balance sheet positions (F32) |
| Currency-induced valuation gains on equity positions (F31) | Offsetting losses on debt positions (G32) |
| Currency depreciation (F31) | Negative external balance sheet effects (G32) |
| Currency-induced valuation effects (F31) | Shaping external positions during the crisis (H12) |