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1、Exchange Rate Movements and the U.S.International Balance SheetFRBSF ECONOMICLETTERNumber 2004-285,September 10,2004Exchange Rate Movements and the U.S.International Balance SheetThe U.S.current account deficit has been growingIn particular,the evidence suggests that since the latefor several years,
2、as the country has been importing1990s,exchange rate movements have had a moreincreasingly more than it has been exporting.In 1992,significant effect on the value of U.S.assets abroadthe current account deficit was 0.8% of GDP,and byand,therefore,have played a larger role in shaping thethe end of 20
3、03,it had soared to an unprecedentedevolution of the NIIP.4.8% of GDP.What is the NIIP,and what are its determinants?To finance this widening deficit,the U.S.has had toThe U.S.NIIP reflects the U.S.international balanceborrow massively from foreigners,resulting in largesheet.On one side of the ledge
4、r is the value of thenet financial inflows.Many have pointed to theseaccumulated stock of U.S.claims on foreigners;thisinflows as the main reason for the rising net U.S.would include,for example,the shares or bonds of,indebtedness to foreigners;in 1992,U.S.net indebt-say,German firms held by U.S.res
5、idents.On the otherednesswas 7% of GDP,and at the end of 2003 it wasside is the value of the accumulated stock of foreignover 24% of GDP.claims on U.S.residents;this would include,for exam-ple,shares or bonds of U.S.firms held by GermanNet foreign indebtedness is measured by the “netresidents.The di
6、fference between the two is the NIIP,international investment position,”or NIIP,which isand when claims of foreigners on the U.S.are greatercalculated annually by the U.S.Bureau of Economicthan U.S.claims on foreigners,it represents the netAnalysis.The NIIP is negative when the value of U.S.foreign
7、indebtedness of the U.S.economy.investments abroad is less than the value of foreigninvestments in the U.S.,and it is positive in the reverseThe types of assets and liabilities included in this mea-case.The size of the negative NIIP has raised con-surego well beyond corporate securities like sharesc
8、erns in some quarters about whether current accountand bonds.For example,U.S.claims on foreignersdeficits of this magnitude are sustainable.For exam-include other private assets,such as the value of U.S.ple,if foreign investors,both private and official,haddirect investment abroad (U.S.subsidiaries
9、and branchesaccumulated a disproportionate share of U.S.-issuedin foreign countries) and U.S.bank loans and tradesecurities in their portfolios,then they might wantcredits.They also include official reserve assets (suchto pull their money out of the U.S.and diversify intoas gold and foreign currency
10、 reserves) and govern-non-U.S.assets.Doing so would shrink the pool ofment assets (such as foreign treasury bills).resources available for the U.S.to finance its foreignborrowing and,according to many,that could lead toAmong the most important determinants of the NIIPhigher interest rates.Higher int
11、erest rates,in turn,and the most commonly referred to until recentlycould put a damper on aggregate demand and leadare net financial inflows.For example,consider todaysto slower economic growth.current account deficit in the U.S.In order to payfor the excess of imports over exports,the U.S.mustRecen
12、t research has examined the evolution of theborrow funds from foreigners,and,by the same token,NIIP and has found that current account deficits andforeigners must purchase liabilities issued by the U.S.the associated net financial inflows are not the onlyHence,a current account deficit generates net
13、 bor-factors influencing it;rather,research finds that changesrowing from abroad.These financial transactions arein asset prices and especially in exchange rates haverecorded as net financial inflows and imply an increaseplayed an important role recently because of theirin the stock of netU.S.liabil
14、ities to foreigners andeffect on the values of the stocks of assets and liabil-a deterioration in the NIIP.ities that make up the NIIP.But another determinant of the NIIP to consider isIn this Economic Letter,I review this literature,discussvaluation adjustment.This occurs through changesthese deter
15、minants of the NIIP,and provide somein the value of the stock of foreign assets owned byevidence on their relative quantitative importance.U.S.residents and in the value of the stock of U.S.FRBSF Economic Letter2Number 2004-25,September 10,2004liabilities held by foreigners.Changes in the valuesFigu
16、re 1of these U.S.assets and liabilities reflect fluctuationsU.S.:change in NIIP vs.change in net financialboth in asset prices and in exchange rates.flows (NFF)Va luation adjustments arising from asset price fluctu-ationsoccur when the prices of existing equity shareschange.For example,when the pric
17、e of the sharesof a U.S.firm owned by a German investor increases,so does the value of his asset holdings of that firm.Therefore,it leads to a deterioration of the U.S.NIIP.In the same way,when the share prices of a U.S.firmfall,so does the value of the foreign investors assetholdings,leading to an
18、improvement in the U.S.NIIP.Conversely,when the price of foreign assets held byU.S.investors increases,the U.S.NIIP improves,whilea drop in those prices leads to a decrease in the valueof the gross asset position and to a deterioration ofthe U.S.NIIP.When assets or liabilities are denominated in for
19、eigncurrencies,exchange rate movements may also cre-ate valuation adjustments affecting the dollar equiv-alent of the value of gross U.S.assets and liabilities.have been in shaping the recent behavior of the U.S.As a substantial fraction of U.S.claims on foreignersNIIP.Specifically,valuation adjustm
20、ents have addedis denominated in foreign currencies (39% accordinga significant counterbalance to the increase in theto Tille 2004),exchange rate movementsgenerateU.S.NIIP arising from the current account deficit.corresponding gains or losses on these assets.Forexample,an appreciation of the dollar
21、drives downA key reason for the growing importance of valua-the dollar value of assets held by U.S.investors thattion adjustments for the U.S.NIIP is the countrysare denominated in foreign currencies.In contrast,increased financial integration with the rest of themost U.S.liabilities to foreigners a
22、re denominatedworld over the last two decades.The volumes of bothin dollars;so their value is basically not affected bygross assets and gross liabilities increased sharply inexchange rate movements.Therefore,holding otherthe U.S.,and,as a result,asset price and exchange ratethings equal,a dollar app
23、reciation results in a dete-fluctuations generated larger capital gains and losses.rioration of the NIIP;and,correspondingly,when thedollar depreciates,the dollar value of foreign-currencySimilar results have been found for other countries.denominated assets held by U.S.investors increases,Lane and
24、Milesi-Ferretti (2001) reported that forresulting in an improvement in the U.S.NIIP.industrialized countries,such as Australia,Austria,Finland,the Netherlands,New Zealand,Sweden,Why do valuation adjustments matter now?Switzerland,the U.K,as well as the U.S.,the corre-Before the late 1990s valuation
25、adjustments had onlylation between the current account and changes ina small impact on the NIIPin other words,netthe NIIP is low or even negative,suggesting thefinancial inflows arising from the current accountincreased importanceof valuation adjustments fordeficit and changes in the NIIP traced eac
26、h othershort-run movements in the NIIP.Like the U.S.,closely for the most part.these countries have developed a significant degree offinancial integration with the rest of the world andIn the late 1990s,however,the two began to divergebuilt up substantial gross international investmentsignificantly.
27、Figure 1 plots net financial inflows andpositions (see also Obstfeld and Rogoff 2001andannual changes in the U.S.NIIP from 1997 to 2003,Lane and Milesi-Ferretti 2003).In a subsequent study,the last year of available data.As the figure shows,inLane and Milesi-Ferretti (2004) found similar pat-1999,fo
28、r example,net financial inflows amounted toterns for some emerging economies,such as Hungary,about 2.5% of GDP,but the change in the NIIP wasIndonesia,Mexico,and Thailand.actually positive at 1% of GDP;on a cumulative basis,from 1998 to 2003 the net financial inflows requiredWhich matters moreasset
29、price changes orto fund the ongoing current account deficits amountedexchange rate movements? to 21.9% of GDP,while the U.S.NIIP deterioratedTille (2003) explores the relative importance of assetby only 11.8%.The difference between these num-price changes and exchange rate changes for valua-bers sug
30、gests how important valuation adjustmentstion adjustments.He finds that between 1999 andFRBSF Economic Letter3Number 2004-25,September 10,20042001 valuation adjustments were responsible for 37%current account deficit.Rather,as Gourinchas andof the worsening of the U.S NIIP,and,of that,30%Rey (2004)
31、have pointed out,the valuation adjust-can be imputed to exchange rate changes;specifically,ment through exchange rates is particularly helpfulthe appreciation of the dollar during that period hadin explaining short-term and medium-term changesa substantial impact on the value of assets held by U.S.i
32、n the NIIPthat is,over at most a couple of years.residents that were denominated in foreign curren-Longer-term developments in the NIIP,however,cies,while asset price declines played a quantitativelyare more deeply rooted in trade and the associatedlimited role.Tille (2004) also reports that during
33、thecondition of current accounts.late 1990s and up to 2002 it was common for valu-ation adjustments caused by exchange rate movementsMichele Cavalloto influence the NIIP substantiallyon the order ofEconomist2% of GDP.Why did exchange rate movements become so impor-Referencestant?The main reason is t
34、he surge in U.S.holdingsURLs accessed August 2004.of assets denominated in foreign currenciestheseamounted to 15% of GDP in 1992 and to 24% atGourinchas,Pierre-Olivier,and Hlne Rey.2004.end of 2002 (Tille 2004).More recently,the relative“International Financial Adjustment.”Mimeo.importance of exchan
35、ge rates appears to continue toUniversity of California,Berkeley./socrates.hold.During 2002 and 2003,as the dollar depreci-berkeley.edu/pog/academic/IFA/ifamarch16.pdfated substantially,valuation adjustments arising fromLane,Philip R.,and Gian Maria Milesi-Ferretti.2001.exchange rate changes cushion
36、ed the deterioration of“The External Wealth of Nations:Measures of the U.S.NIIP.As the figure illustrates,net financialForeign Assets and Liabilities for Industrial and inflows amounted to about 5.4% of GDP in 2002Developing Countries.”Journal of International and 5% in 2003,while the ratio of the N
37、IIP to GDPEconomics55 (December),pp.263294.actually improved by 0.26% between those two years.The improvement is accounted for by valuation adjust-Lane,Philip R.,and Gian Maria Milesi-Ferretti.2003.ments,and the bulk of it by exchange rate movements.“International Financial Integration.”IMF Staff Pa
38、pers50 (September),pp.82113./.imfConclusions.org/External/Pubs/FT/staffp/2002/00-00/pdf/ The increase in the degree of financial integration oflane.pdfthe U.S.with the rest of the world has widened thechannel by which valuation adjustments,and partic-Lane,Philip R.,and Gian Maria Milesi-Ferretti.200
39、4.ularlyexchange rate movements,can affect the NIIP.“Financial Globalization and Exchange Rates.”For example,a depreciation of the dollar can improveMimeo.IMF./.imf.org/external/np/res/the NIIP,as gross assets are exposed to valuation ad-seminars/2004/60/pdf/ferret.pdfjustmentsdue to exchange rate m
40、ovements,whileObstfeld,Maurice,and Kenneth Rogoff.2001.gross liabilities are not;this valuation effect of ex-“Perspectives on OECD Economic Integration:change rate movements is equivalent to a transfer ofImplications for U.S.Current Account Adjustment.”wealth from foreign countries to the U.S.Likewi
41、se,In Global Economic Integration:Opportunities and an increase in the value of the dollar worsens theChallenges,pp.169208.FRB Kansas City./NIIP and it is equivalent to a wealth transfer from.kc.frb.org/publicat/sympos/2000/S00rogo.pdfthe U.S.to the foreign countries it borrows from.Tille,Cdric.2003
42、.“The Impact of Exchange Rate The consequences of exchange rate movements forMovements on U.S.Foreign Debt.”Current Issues a country that borrows indollars,as many emerg-in Economics and Finance9 (January),pp.17.FRB ing market economies do,however,are quite differ-New York./.ny.frb.org/research/curr
43、ent_ent.A depreciation of its own currency increases theissues/ci9-1.htmlburden of its foreign borrowing and worsens its NIIP.Tille,Cdric.2004.“Financial Integration and the WealthAll this is not to say,however,that we need not payEffect of Exchange Rate Fluctuations.”Mimeo.FRBattention to the relat
44、ion between the NIIP and theNew York.ECONOMICRESEARCHPRESORTED STANDARD MAILU.S.POSTAGEPAIDFEDERALRESERVEBANKPERMIT NO.752San Francisco,Calif.OFSANFRANCISCOP.O.Box 7702San Francisco,CA 94120Address Service RequestedPrinted on recycled paperwith soybean inksIndex to Recent Issues of FRBSF Economic Le
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