The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets
A major focus of the recent literature on the determination of optimal portfolios in open-economy macroeconomic models has been on the role of currency movements in determining portfolio returns that may hedge various macroeconomic shocks. However, there is little empirical evidence on the foreign currency exposures that are embedded in international balance sheets. Using a new database, we provide stylized facts concerning the cross-country and time-series variation in aggregate foreign currency exposure and its various subcomponents. In panel estimation, we find that richer, more open economies take longer foreign-currency positions. In addition, we find that an increase in the propensity for a currency to depreciate during bad times is associated with a longer position in foreign currencies, providing a hedge against domestic output fluctuations. We view these new stylized facts as informative in their own right and also potentially useful to the burgeoning theoretical literature on the macroeconomics of international portfolios.
Prepared for the IMF/WEF Conference on International Macro-Finance (Washington DC, April 24-25 2008). We thank the anonymous referees, Laura Alfaro, Chris Meissner, Cedric Tille and participants in IMF/WEF Conference on International Macro-Finance (Washington DC, April 24-25 2008), the second annual CEGE conference at UC Davis, the CGFS-BIS Workshop and a seminar at Dartmouth College. Agustín Bénétrix, Vahagn Galstyan, Barbara Pels and Martin Schmitz provided excellent research assistance. Email: firstname.lastname@example.org; Jay.C.Shambaugh@dartmouth.edu. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Lane, Philip R. & Shambaugh, Jay C., 2010. "The long or short of it: Determinants of foreign currency exposure in external balance sheets," Journal of International Economics, Elsevier, vol. 80(1), pages 33-44, January. citation courtesy of