Abstract
The aim of this paper is to evaluate the significance of the valuation effect in determining the dynamics of the net international investment position of CEE economies. For this purpose an analysis of BoP and IIP time series for the four largest CEE economies (Poland, the Czech Republic, Hungary and Romania) for the years 2005-2013 was carried out. The exercise revealed that the valuation effect (VE) is, in the short run, the key determinant of net IIP changes (for most observed years). Nevertheless, in the long-run its influence decreases as valuation gains and losses tend to cancel each other out. As the VE is relatively volatile, it is important to analyse its dynamics over the mid and long-term when evaluating the IIP. The significance of the VE for determining net IIP dynamics turned out to be non-investment-type specific because valuations of both the short-term and long-term investments contributed in a large part to the change in the net IIP. Similarities in the dynamics of the VE in CEE countries prove that the VE depends to a large extent on the general price fluctuations in financial markets that nowadays exhibit strong correlations across countries.
Highlights
Economic transactions between residents and nonresidents influence the level of foreign assets and liabilities compounding the international investment position (IIP) of a national economy
As the ratio for the variance of the valuation term to the variance of the change in net IIP is well above 50% for most countries, they conclude that the evolution of the net IIP is dominated by valuation gains and losses resulting from changes in asset prices and exchange rates
The aim of this paper is to evaluate the significance of the valuation effect for determining the dynamics of the net IIP in Central and Eastern European economies (CEE) economies
Summary
Economic transactions between residents and nonresidents influence the level of foreign assets and liabilities compounding the international investment position (IIP) of a national economy. Lane and Milesi-Ferretti (2001) estimate foreign assets and liabilities for 67 countries (excluding Central and Eastern European transition economies) for the period 1970–1998 based on balance of payments data and explore the sensitivity of the estimates to the valuation adjustment They indicate that the valuation effects are quantitatively important for a number of countries in the sample. Gourinchas (2008) indicates that short-term fluctuations in a country’s external asset position appear to be increasingly driven by the valuation component He measures the cumulative valuation effect (since 1950) in a sample of industrialised countries and concludes that it is significant and has been growing in recent years: reaching 50% of GDP in the UK in 2000, 20% of GDP in the US and Canada in 2004 and slightly less in Australia. Their research indicates that the importance of the valuation effect has been increasing over time and the average magnitude of the current account transactions tend to be dominated by the average magnitude of valuation effects for determining the IIP adjust-
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