Nguyen, Ha2014-09-022014-09-022010-01https://hdl.handle.net/10986/19945In the past two decades, cross-border portfolio holdings of a large variety of assets have risen sharply. This has created an important role for changes in asset prices of a country's external assets and liabilities (i.e. "valuation effects") in affecting the country's net foreign asset position. Valuation effects are commonly thought as stabilizing: they counteract current account movements and mitigate the impact of the current account on the country's net foreign asset position. This paper shows that whether valuation effects are stabilizing or not depends critically on the nature of underlying productivity shocks. In response to transitory shocks, valuation effects are stabilizing; but in response to trend shocks, such effects amplify the impact of the current account on the net foreign asset position. These contrasting results arise because optimally smoothing consumers respond differently to a transitory shock than to a trend shock to income. The results are consistent with the pattern of external imbalances between the United States and other G.7 countries since the 1990s.en-USCC BY 3.0 IGOADJUSTMENT COSTADJUSTMENT COST PARAMETERADJUSTMENT COSTSANNUAL GROWTHASSET HOLDINGASSET POSITIONASSET PRICEASSET PRICESBALANCE OF PAYMENTSBONDBONDSBUDGET CONSTRAINTBUDGET CONSTRAINTSBUSINESS CYCLEBUSINESS CYCLESCAPITAL FLOWSCAPITAL GAINCAPITAL GAINSCAPITAL SHARECAPITAL STOCKCOMMUNICATION TECHNOLOGYCONSUMERSCONSUMPTION GOODCONSUMPTION GROWTHCONSUMPTION SMOOTHINGCREDIT MARKETCROSS-BORDER SECURITIESCURRENCYCURRENT ACCOUNTCURRENT ACCOUNT BALANCECURRENT ACCOUNT DEFICITCURRENT ACCOUNT DEFICITSCURRENT ACCOUNT SURPLUSDEPRECIATIONDEPRECIATION RATEDEVELOPMENT ECONOMICSDIVIDENDDIVIDEND PAYMENTDIVIDEND PAYMENTSDIVIDEND YIELDDIVIDENDSDOMESTIC ECONOMYDOMESTIC EQUITYECONOMIC ANALYSISECONOMIC GROWTHECONOMIC RESEARCHECONOMIC THEORYELASTICITYEMERGING MARKETEMERGING MARKET BUSINESSEMERGING MARKETSEQUILIBRIUMEQUITY HOLDINGSEQUITY PORTFOLIOSEQUITY PRICESEXCESS RETURNEXCHANGE RATEEXCHANGE RATE FLUCTUATIONSEXCHANGE RATE MOVEMENTSEXCHANGE RATESEXCHANGE-RATEEXTERNAL ASSETSFEDERAL RESERVEFEDERAL RESERVE SYSTEMFINANCIAL ASSETSFINANCIAL INTEGRATIONFINANCIAL MARKETSFOREIGN ASSETFOREIGN ASSET POSITIONFOREIGN ASSETSFOREIGN EQUITIESFOREIGN EQUITYFOREIGN EXCHANGEFOREIGN EXCHANGE RATESFOREIGN FIRMSFOREIGN INVESTMENTFOREIGN INVESTORSFUTURE RESEARCHGDPGENERAL EQUILIBRIUMGENERAL EQUILIBRIUM MODELGENERAL EQUILIBRIUM MODELSGLOBAL CURRENT ACCOUNT IMBALANCESGLOBAL IMBALANCESGLOBALIZATIONGROWTH RATEGROWTH ¯ RATEHOME COUNTRYHOST COUNTRYIMBALANCESINCOMPLETE MARKETSINTEREST RATEINTEREST RATESINTERNATIONAL BANKINTERNATIONAL CAPITALINTERNATIONAL CAPITAL FLOWSINTERNATIONAL DIVERSIFICATIONINTERNATIONAL ECONOMICSINTERNATIONAL FINANCEINTERNATIONAL MONEYINTERNATIONAL PORTFOLIOINTERNATIONAL PORTFOLIOSINTERNATIONAL TRANSACTIONSINVESTINGLABOR COSTSLABOR DEMANDLABOR SUPPLYLOCAL ECONOMYLOCAL MARKETLOW INTEREST RATESMACROECONOMICSMARGINAL UTILITYMARKET ACCESSMARKET STRUCTURESMONETARY ECONOMICSOPEN ECONOMYOUTPUTOUTPUT RATIOPERISHABLE GOODPERMANENT INCOMEPERSISTENT CURRENT ACCOUNT DEFICITSPOLITICAL ECONOMYPORTFOLIOPORTFOLIO CHOICEPORTFOLIO CHOICESPORTFOLIO HOLDINGPORTFOLIO HOLDINGSPORTFOLIOSPRICE INDEXPRICE RATIOPRODUCTIVITYPRODUCTIVITY GROWTHPURCHASING POWERPURCHASING POWER PARITYREAL ASSETRETURNRETURNSRISK AVERSIONSECURITIESSHARE OF WORLD OUTPUTSHAREHOLDERSSHOCK TO INCOMESTANDARD DEVIATIONSTANDARD DEVIATIONSSTEADY STATESTOCK PRICESTOCK PRICESSTOCKSTOTAL FACTOR PRODUCTIVITYTRADE BALANCETRADINGTURNOVERVALUATIONVALUATION CHANGESVOLATILITYWAGESWEALTH10.1596/1813-9450-5174