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International Financial Adjustment**

Gourinchas, P.O., Rey, H.
Date Published: 2007
Gourinchas, Pierre-Olivier, and Helene Rey. "International Financial Adjustment." Journal of Political Economy, 115:4, pp. 665‐703, August 2007.

Abstract:
We explore the implications of a country’s external constraint for the dynamics of net foreign assets, returns and exchange rates. Deteriorations in external accounts imply future trade surpluses (trade channel) or excess returns on the net foreign portfolio (valuation channel). Using a new dataset on US gross external positions, we find that stabilizing valuation effects contribute 27% of the cyclical external adjustment. Our approach has asset pricing implications: external imbalances predict net foreign portfolio returns one-quarter to two-years ahead and net export growth at longer horizons. The exchange rate is forecastable in and out-of-sample at one quarter and beyond.



Citation:
Gourinchas, Pierre-Olivier, and Helene Rey. "International Financial Adjustment." Journal of Political Economy, 115:4, pp. 665‐703, August 2007.
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**This material is based upon work supported by the National Science Foundation under Grant No. 0519217.



[Online Appendix: available here. Longer and more detailed working paper version available here] [Data: Gross positions and total nominal returns by asset class, flows, NXA are available here.] [Media coverage: Financial Times, Il Sole 24 Ore, Handelsblatt , Le Monde].

CEPR DP 4923, NBER WP 11155.

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