Valuation effects
Encyclopedia
Valuation Effects is a term in economics
.
Valuation Effects of a country are the changes in the value of assets it holds abroad, minus the changes in the value of domestic assets held by foreign investors.
are fully captured by the current account
.
The new balance of payment identity, however, considers the role of asset price changes and valuation effects. Changes in the NFA equal the current account plus valuation effects.
deficits and therefore mitigating the decline of its net foreign assets
.
The U.S. during 1994-2007 accumulated more than US$5 trillions in current account deficits. This figure will be rising at least in 2009 and 2010. The phenomenon understandably raises a lot of concerns about the size of the U.S. external debts, because a high, unsustainable external debt will result in painful debt service and/or sharp depreciation of the dollar.
New evidence however suggests that while the U.S. has been experiencing large, persistent current account deficits, the assets U.S. investors hold overseas are gaining more in value compared to the value of U.S. assets held by foreign investors. The positive valuation effects represent financial gains for the U.S. (some attribute this phenomenon to exorbitant privilege
). Economists at the Federal Reserve estimated that during 1994-2007, the U.S. valuation effects (in stocks and bonds) are about +$1.2 trillion, about 22% of the U.S. total current account deficits ,.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
.
Valuation Effects of a country are the changes in the value of assets it holds abroad, minus the changes in the value of domestic assets held by foreign investors.
Valuation Effects
The traditional balance of payment identity ignores valuation effects, only recognizes that changes in the net foreign assetsNet foreign assets
In economics, the concept of net foreign assets relates to balance of payment identity.The net foreign asset position of a country is the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigners...
are fully captured by the current account
Current account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...
.
The new balance of payment identity, however, considers the role of asset price changes and valuation effects. Changes in the NFA equal the current account plus valuation effects.
Valuation Effects and the U.S.'s Current Account Deficits
Valuation effects are increasingly important for the U.S. in the last two decades, given a dramatic, sharp rise in international cross country portfolio holdings. For the U.S., valuation effects are offsetting its current accountCurrent account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...
deficits and therefore mitigating the decline of its net foreign assets
Net foreign assets
In economics, the concept of net foreign assets relates to balance of payment identity.The net foreign asset position of a country is the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigners...
.
The U.S. during 1994-2007 accumulated more than US$5 trillions in current account deficits. This figure will be rising at least in 2009 and 2010. The phenomenon understandably raises a lot of concerns about the size of the U.S. external debts, because a high, unsustainable external debt will result in painful debt service and/or sharp depreciation of the dollar.
New evidence however suggests that while the U.S. has been experiencing large, persistent current account deficits, the assets U.S. investors hold overseas are gaining more in value compared to the value of U.S. assets held by foreign investors. The positive valuation effects represent financial gains for the U.S. (some attribute this phenomenon to exorbitant privilege
Exorbitant privilege
The exorbitant privilege is a term coined in the 1960s by Valéry Giscard d'Estaing, then the French Minister of Finance.This quote is generally misattributed to Charles de Gaulle, who is said to have had somewhat similar views....
). Economists at the Federal Reserve estimated that during 1994-2007, the U.S. valuation effects (in stocks and bonds) are about +$1.2 trillion, about 22% of the U.S. total current account deficits ,.