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At the onset of the COVID-19 economic crisis, as in other crisis episodes, we observed a rapid appreciation of "safe haven" currencies. We quantify currency-induced balance sheet valuation effects for aggregate external positions as well as for broadly defined asset classes for the first quarter and the full year 2020. To do so, we use new data on the currency composition of cross-border assets and liabilities for 46 countries. In contrast with past financial crises, many emerging markets did not experience losses on their aggregate external balance sheets despite facing a domestic currency depreciation. This was partly due to currency-induced valuation gains on equity positions offsetting losses on debt positions, and partly due to reduced currency mismatch on their external debt positions. We conduct the stock-flow reconciliation of net international investment positions to measure overall valuation effects and compute the proportion that is due to changes in currency values. For about half of the countries in our sample, currency-induced valuation effects were substantial, representing over 50 percent of total valuation effects in 2020Q1 and the full year 2020.

At the onset of the COVID-19 economic crisis, as in other crisis episodes, we observed a rapid appreciation of "safe haven" currencies. We quantify currency-induced balance sheet valuation effects for aggregate external positions as well as for broadly defined asset classes for the first quarter and the full year 2020. To do so, we use new data on the currency composition of cross-border assets and liabilities for 46 countries. In contrast with past financial crises, many emerging markets did not experience losses on their aggregate external balance sheets despite facing a domestic currency depreciation. This was partly due to currency-induced valuation gains on equity positions offsetting losses on debt positions, and partly due to reduced currency mismatch on their external debt positions. We conduct the stock-flow reconciliation of net international investment positions to measure overall valuation effects and compute the proportion that is due to changes in currency values. For about half of the countries in our sample, currency-induced valuation effects were substantial, representing over 50 percent of total valuation effects in 2020Q1 and the full year 2020.

Recent economic events pose challenging questions for macroeconomists. The rising global imbalances raise the issue whether existing international macroeconomic models can explain the patterns observed in the data on real exchange rates and current accounts. The first chapter of this dissertation addresses the question whether a standard portfolio balance model can account for the long-run dynamic behavior of the real exchange rate and net foreign debt in the United States (US). The rest of the dissertation does not test how well theoretical models fit reality but uses models in order to understand reality better. The second and third chapters are motivated by the most significant economic event in the last decade-the US 2008 financial crisis. It triggered a major collapse in US real activity, called the Great Recession, and disrupted the job matching process in the labor market. The second chapter of this dissertation addresses the challenges faced by monetary policymakers in response to an increase in labor market frictions. Two striking features of the Great Recession are the speed and synchronicity with which real activity collapsed across the world. The third chapter analyzes how shocks such as the 2008 crisis are transmitted across countries. The findings of each chapter are briefly summarized in the following paragraphs.A strand of models of the joint behavior of the current account, net foreign debt stock and the real exchange rate postulate that this behavior is driven by saddle-path dynamics and the related portfolio balance effect. This saddle-path dynamics is based on the assumption that domestic and foreign assets are imperfect substitutes and that the financial markets clear before the goods markets. Chapter 1 uses the Johansen test for cointegration to check the prediction of a portfolio balance model that the net foreign debt stock and real exchange rate display saddle path dynamics. Newly constructed quarterly series on the face value of the United

Recent economic events pose challenging questions for macroeconomists. The rising global imbalances raise the issue whether existing international macroeconomic models can explain the patterns observed in the data on real exchange rates and current accounts. The first chapter of this dissertation addresses the question whether a standard portfolio balance model can account for the long-run dynamic behavior of the real exchange rate and net foreign debt in the United States (US). The rest of the dissertation does not test how well theoretical models fit reality but uses models in order to understand reality better. The second and third chapters are motivated by the most significant economic event in the last decade-the US 2008 financial crisis. It triggered a major collapse in US real activity, called the Great Recession, and disrupted the job matching process in the labor market. The second chapter of this dissertation addresses the challenges faced by monetary policymakers in response to an increase in labor market frictions. Two striking features of the Great Recession are the speed and synchronicity with which real activity collapsed across the world. The third chapter analyzes how shocks such as the 2008 crisis are transmitted across countries. The findings of each chapter are briefly summarized in the following paragraphs.A strand of models of the joint behavior of the current account, net foreign debt stock and the real exchange rate postulate that this behavior is driven by saddle-path dynamics and the related portfolio balance effect. This saddle-path dynamics is based on the assumption that domestic and foreign assets are imperfect substitutes and that the financial markets clear before the goods markets. Chapter 1 uses the Johansen test for cointegration to check the prediction of a portfolio balance model that the net foreign debt stock and real exchange rate display saddle path dynamics. Newly constructed quarterly series on the face value of the United

Despite the liberalization of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanations of equity home bias: transaction costs that impede international diversification, and terms of trade responses to supply shocks that provide risk sharing, so that there is little incentive to hold diversified portfolios. We show that the interaction of the following ingredients generates a realistic equity home bias: capital accumulation and international trade in stocks and bonds. In our model, domestic stocks are used to hedge fluctuations in local wage income. Terms of trade risk is hedged using bonds denominated in local goods and in foreign goods. In contrast to related models, the low level of international diversification does not depend on strongly countercyclical terms of trade. The model also reproduces the cyclical dynamics of foreign asset positions and of international capital flows. © 2009 Elsevier B.V. All rights reserved., SCOPUS: ar.j, info:eu-repo/semantics/published

Despite the liberalization of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanations of equity home bias: transaction costs that impede international diversification, and terms of trade responses to supply shocks that provide risk sharing, so that there is little incentive to hold diversified portfolios. We show that the interaction of the following ingredients generates a realistic equity home bias: capital accumulation and international trade in stocks and bonds. In our model, domestic stocks are used to hedge fluctuations in local wage income. Terms of trade risk is hedged using bonds denominated in local goods and in foreign goods. In contrast to related models, the low level of international diversification does not depend on strongly countercyclical terms of trade. The model also reproduces the cyclical dynamics of foreign asset positions and of international capital flows. © 2009 Elsevier B.V. All rights reserved., SCOPUS: ar.j, info:eu-repo/semantics/published

In the past two decades, cross country portfolio holdings of a large variety of assets have risen sharply. This has created an important role for changes in asset prices, or valuation effects". This dissertation examines the role of valuation effects in a country's external adjustment. The dissertation is organized as follows: Chapter 1 is a brief introduction. Chapter 2 presents some facts about the U.S.'s valuation effects from stocks and bonds during 1994-2007. In particular, total valuation effects from stocks and bonds during this period were $1295 billions, offsetting about 22.8% the size of the U.S.'s total current account deficits. Much of the positive, stabilizing effects arose after 2002. Before 2002 the valuation effects were often negative and reinforcing the current account deficits. Chapters 3, 4 and 5 present a two-country dynamic stochastic general equilibrium (DSGE) model to study valuation effects theoretically. Chapter 3 outlines the set up of the model, where output has a transitory and a trend component, both of which are subject to AR(1) shocks. Chapter 4 solves analytically a simplified version of the model that only considers transitory output shocks. It shows that valuation effects are stabilizing in response to transitory shocks. That is, valuation effects move in the opposite directions of the current account, and mitigate the impact of the current account on the NFA position. Chapter 4 also shows analytically that the size of valuation effects relative to the current account is positively related with the level of financial integration, which in turn increases with risk aversion, with output volatility, with output persistence, and decreases with the discount factor and with the cost of investing abroad. For the benchmark calibration, when domestic investors hold about 40% of their financial wealth in foreign equity, valuation effects will completely offset the current account. Chapter 5 solves numerically for the full version of the mode

We document that firms in eight East Asian countries and Japan diversify into more segments and engage into more related businessesas measured by the degree of vertical relatedness and complementaritythan firms in the USA. Using data for the 1990-6 period, we observe a trend towards complementary diversification in the United States and the eight East Asian countries, and a trend towards more vertical integration in Japan. The increase in relatedness for US firms is due to the divestiture of unrelated assets. In contrast, the increase in relatedness for firms in Japan and East Asia is due to expansion into related businesses. We also document the valuation effects of the diversification level, vertical relatedness and complementarity. We observe that diversification hurts the valuation of East Asian firms less than the valuation of firms in the Unites States and Japan. However, vertical diversification hurts the valuation of companies in East Asian more than the valuation of USA and Japanese firms. Complementary diversification is not detrimental to corporate value, and even enhances value in the USA, Japan, Korea, and Singapore.