EconStor >
Federal Reserve Bank of New York >
Staff Reports, Federal Reserve Bank of New York >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/60559
  
Title:Could capital gains smooth a current account rebalancing? PDF Logo
Authors:Cavallo, Michele
Tille, Cedric
Issue Date:2006
Series/Report no.:Staff Report, Federal Reserve Bank of New York 237
Abstract:A narrowing of the U.S. current account deficit through exchange rate movements is likely to entail a substantial depreciation of the dollar, as stressed in research by Obstfeld and Rogoff. We assess how the adjustment is affected by the high degree of financial integration in the world economy. A growing body of research emphasizes the increasing leverage in international financial positions, with industrialized economies holding substantial and growing financial claims on each other. Exchange rate movements then lead to valuation effects as the currency composition of a country's assets and liabilities are not matched. In particular, a dollar depreciation generates valuation gains for the United States by boosting the dollar value of much of its foreign-currency-denominated assets. We consider an adjustment scenario in which the U.S. net external debt is held constant. The key finding is that as the current account moves into balance, the pace of adjustment is smooth. Intuitively, the valuation gains from the depreciation of the dollar allow the United States to finance ongoing, albeit shrinking, current account deficits. We find that the smooth pattern of adjustment is robust to alternative scenarios, although the ultimate movements in exchange rates will vary under different conditions.
Subjects:current account, exchange rates, global imbalances
JEL:F31
F32
F41
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

Files in This Item:
File Description SizeFormat
506895750.pdf480.09 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/60559

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.