The anatomy of large valuation episodes

Abstract

We examine cases in which there is a large shift in a country’s net foreign asset position due to the re-valuation of its foreign assets and/or foreign liabilities. We highlight the differences in large valuation shocks between countries characterized by large gross stocks of foreign assets and foreign liabilities and countries exhibiting large net external positions. Finally, we analyze macroeconomic dynamics in the neighborhood of large valuation episodes.

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Notes

  1. 1.

    Although we take Eq. 1 as the valuation channel, it is important to mention that part of the difference between the change in the net foreign asset position and the capital flows may be explained by data revisions (Lane and Milesi-Ferretti 2009). This decomposition of net foreign assets dynamics between the valuation term and current account is also analogous to Eq. 21 in Ghironi et al. (2007).

  2. 2.

    We compare diversification finance versus development finance international investments. See Obstfeld and Taylor (2003).

  3. 3.

    We analyze only advanced countries with negative Type-A large valuation episodes because we are interested in drawing general cross-country regularities and the only advanced country with a positive Type-A episode is the United Kingdom in 1999.

  4. 4.

    In this group, South Africa is the only country experiencing real appreciation (2.9%). If we exclude this country to compute the mean depreciation, the mean fall would have been −20.7%.

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Acknowledgments

The author would like to thank an anonymous referee for helpful comments and suggestions, Philip R. Lane for his continuous encouragement and help with the External Wealth of Nations database. The author gratefully acknowledges the Institute for International Integration Studies (IIIS) at Trinity College Dublin for financial support.

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Correspondence to Agustín S. Bénétrix.

Appendix: countries and data sources

Appendix: countries and data sources

Countries: The set of countries used to identify the 59 large valuation shocks is formed by 17 emerging markets and developing countries and 21 advanced countries. The former is composed of Argentina, Brazil, Chile, China, Colombia, India, Indonesia, Israel, Korea, Malaysia, Mexico, Pakistan, the Philippines, South Africa, Thailand, Turkey and Venezuela. The latter group is formed by Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom and the United States.

Data: Stocks and flows of foreign assets and liabilities (Lane and Milesi-Ferretti 2007a). Trade balance (Direction of Trade Statistics, IMF). Constant GDP in local currency (World Development Indicators). Current account balance and real exchange rate (International Financial Statistics, IMF). Equity price index (Morgan Stanley Capital International Inc.). Total return bond index (Global Financial Data). Foreign assets are the sum of portfolio equity assets, foreign direct investment and debt assets (debt assets includes foreign exchange reserves minus gold). Foreign liabilities are the sum of portfolio equity liabilities, foreign direct investment and debt liabilities.

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Bénétrix, A.S. The anatomy of large valuation episodes. Rev World Econ 145, 489 (2009). https://doi.org/10.1007/s10290-009-0026-1

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Keywords

  • International financial integration
  • Valuation channel
  • Valuation episodes

JEL Classification

  • F32
  • F36