Are Valuation Effects Desirable from a Global Perspective?
New York University - Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
NBER Working Paper No. w12219
Recent studies have emphasized the role of valuation effects due to exchange rate movements in easing the process of adjustment of the external balance of a country. This paper asks to what extent valuation effects are desirable from a global perspective as a mean to achieve an efficient allocation of resources. In a frictionless world, it is desirable to have large movements in prices and exchange rates. But once a small concern for price stability is introduced not only should prices be stabilized but also the response of the exchange rate should be muted. There is a minor role for valuation effects that depends both on the size and composition of assets and liabilities.
Number of Pages in PDF File: 47
Date posted: July 17, 2006
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