DP6887 The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets

Author(s): Philip R. Lane, Jay C Shambaugh
Publication Date: June 2008
Keyword(s): exchange rates, Financial globalization, international portfolios
JEL(s): F31, F32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6887

Recently, there have been numerous advances in modelling optimal international portfolio allocations in macroeconomic models. A major focus of this literature 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.