International Financial Adjustment

We explore the implications of a country’s external constraint for the dynamics of net foreign assets, returns, and exchange rates. Deteriorations in external accounts imply future trade surpluses (trade channel) or excess returns on the net foreign portfolio (valuation channel). Using a new data se...

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Bibliographic Details
Published in:The Journal of political economy 2007-08, Vol.115 (4), p.665-703
Main Authors: Gourinchas, Pierre‐Olivier, Rey, Hélène
Format: Article
Language:English
Subjects:
Balance of payments
Balance of trade
Depreciation
Determinism
Economic fluctuations
Economic theory
Exchange rates
Foreign assets
Foreign exchange
Foreign exchange rates
Imports
International monetary economics
Mathematical models
Monetary reserves
Net exports
Political economy
Portfolio performance
Predictability
Statistical analysis
Studies
Trade flows
U.S.A
Wealth
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Summary:We explore the implications of a country’s external constraint for the dynamics of net foreign assets, returns, and exchange rates. Deteriorations in external accounts imply future trade surpluses (trade channel) or excess returns on the net foreign portfolio (valuation channel). Using a new data set on U.S. gross external positions, we find that stabilizing valuation effects contribute 27 percent of the cyclical external adjustment. Our approach has asset‐pricing implications: external imbalances predict net foreign portfolio returns one quarter to two years ahead and net export growth at longer horizons. The exchange rate is forecastable in and out of sample at one quarter and beyond.
ISSN:0022-3808
1537-534X
DOI:10.1086/521966