Are Valuation Effects Desirable from a Global Perspective?
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.
I am grateful to Gianluca Benigno, Refet Gurkaynak, Philip Lane, Ken Rogoff, Luca Sessa, Cedric Tille, Mike Woodford, seminar participants at the Bank of Italy, ECB, IMF, John Hopkins University, the Konstanz Seminar on Monetary Theory and Policy and the conference on ?New Perspective on Financial Globalization? at the IMF for helpful comments and discussions. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Beigno, Pierpaolo. “Are Valuation Effects Desirable from a Global Perspective?” Journal of Development Economics 89 (2009): 170-180. citation courtesy of