TY - JOUR AU - Ghironi,Fabio AU - Lee,Jaewoo AU - Rebucci,Alessandro TI - The Valuation Channel of External Adjustment JF - National Bureau of Economic Research Working Paper Series VL - No. 12937 PY - 2007 Y2 - February 2007 UR - http://www.nber.org/papers/w12937 L1 - http://www.nber.org/papers/w12937.pdf N1 - Author contact info: Fabio Ghironi Boston College Department of Economics 140 Commonwealth Avenue Chestnut Hill, MA 02467-3859 Tel: 617/552-3686 Fax: 617/552-2308 E-Mail: fabio.ghironi@bc.edu Jaewoo Lee Research Department International Monetary Fund Washington DC, 20431 E-Mail: jlee3@imf.org Alessandro Rebucci Inter-American Development Bank Research Department 1300 New York Av., Washington, DC 20577 USA Tel: 202 623 3873 Fax: 202 623 2481 E-Mail: alessandroR@iadb.org AB - Ongoing international financial integration has greatly increased foreign asset holdings across countries, enhancing the scope for a "valuation channel" of external adjustment (i.e., the changes in a country's net foreign asset position due to exchange rate and asset price changes). We examine this channel of adjustment in a dynamic stochastic general equilibrium model with international equity trading in incomplete asset markets. We show that the risk-sharing properties of international equity trading are tied to the distribution of income between labor income and profits when equities are defined as claims to firm profits in a production economy. For a given level of international financial integration (measured by the size of gross foreign asset positions), the quantitative importance of the valuation channel of external adjustment depends on features of the international transmission mechanism such as the size of financial frictions, substitutability across goods, and the persistence of shocks. Finally, moving from less to more international financial integration, risk sharing through asset markets increases, and valuation changes are larger, but their relative importance in net foreign asset dynamics is smaller. ER -