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International Monetary Fund. Monetary and Capital Markets Department

exchange rates. 22 This is not to say that exchange rate fluctuations cannot have an impact on countries with large external creditor positions, such as Switzerland. However, when averaged over long periods of time, these valuation effects are not systematically related to the current account balance. This result suggests that factors linked to bond and asset price differentials, debt restructuring, and debt write-offs are driving the valuation effects. Implications for the Outlook and Policies This section summarizes possible implications of the chapter

Gustavo Adler, Mr. Daniel Garcia-Macia, and Mr. Luis M. Cubeddu

, on the back of lax monetary policy in AEs, these changes were offset by smaller exchange rate and asset price differentials. Table 2: NFA Returns and Return Differentials, Advanced and Emerging Markets (annual average, in percent of GDP and percent) Sample AEs EMEs Period 1990-2015 1990-2007 2008-15 1990-2015 1990-2007 2008-15 Trade balance −0.7 −0.6 −1.0 2.2** 2.1* 2.4** Real NFA return 0.4 0.4 0.5 −1.9*** −2.4** −1.4** – Valuation change 0.0 0.2 −0.4 −0.4 −0.9 0

Gustavo Adler and Mr. Daniel Garcia-Macia
With the rapid growth of countries' foreign asset and liability positions over the last two decades, financial returns on those positions ('NFA returns') have become material drivers of current accounts and net stock positions. This paper documents the relative importance of NFA return versus trade channels in driving NFA dynamics, for a sample of 52 economies over 1990-2015. While persistent trade imbalances have been a strong force leading to diverging NFA positions, NFA returns have played an important stabilizing role, mitigating NFA divergence. The stabilizing role of NFA returns primarily reflects the response of asset prices, rather than yield differentials or exchange rates. There is also evidence of heterogeneity in the speed of NFA adjustment, with emerging market economies adjusting more rapidly than advanced economies, and reserve-currency countries adjusting more slowly than others. The paper also documents the role of NFA returns as insurance against domestic and global income shocks, with a focus on reserve-currency countries.
Gustavo Adler and Mr. Daniel Garcia-Macia

valuation losses. 17 Results for the euro area should also be interpreted more cautiously given the shorter time span of the data. 18 This seems to be primarily explained by asset price differentials, with additional (but not primary) contributions from both yield and exchange rate differentials. 19 Specifically, a steady state exists if −1 < β < 0, and it is given by nf a ss = − κ c / β (for the baseline case δ = 0). The underlying assumption is that, while persistent drivers of the NFA can be different in magnitude across countries, the

International Monetary Fund. Monetary and Capital Markets Department

exchange rates. 22 This is not to say that exchange rate fluctuations cannot have an impact on countries with large external creditor positions, such as Switzerland. However, when averaged over long periods of time, these valuation effects are not systematically related to the current account balance. This result suggests that factors linked to bond and asset price differentials, debt restructuring, and debt write-offs are driving the valuation effects. Implications for the Outlook and Policies This section summarizes possible implications of the chapter