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Financial Exchange Rates and International Currency Exposures

Author

Listed:
  • Philip Lane
  • Jay C. Shambaugh
Abstract
Our goal in this project is to gain a better empirical understanding of the international financial implications of currency movements. To this end, we construct a database of international currency exposures for a large panel of countries over 1990-2004. We show that trade-weighted exchange rate indices are insufficient to understand the financial impact of currency movements. Further, we demonstrate that many developing countries hold short foreign-currency positions, leaving them open to negative valuation effects when the domestic currency depreciates. However, we also show that many of these countries have substantially reduced their foreign currency exposure over the last decade. Last, we show that our currency measure has high explanatory power for the valuation term in net foreign asset dynamics: exchange rate valuation shocks are sizable, not quickly reversed and may entail substantial wealth shocks.

Suggested Citation

  • Philip Lane & Jay C. Shambaugh, 2007. "Financial Exchange Rates and International Currency Exposures," NBER Working Papers 13433, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13433
    Note: IFM
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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