Essays On International Financial Adjustment

International financial adjustment has become an important topic in open economy macroeconomics,both empirically and theoretically.Financial globalization speeds up and the cross-border assets holdings grow rapidly since 1980 s.Because the structure of external balance sheet differs significantly across countries,exchange rate and(or)assets prices fluctuations may induce the valuation change of external assets and liabilities.These valuation effects may have an impact on external adjustment and the real economy,the wealth effects caused by them may also influence the wealfare of the household.Classic intertemporal method of current accounts does not consider those effects mentioned above,since in intertemporal open economy model,the accumulated current account should equals to the change of net foreign assets.Economic theory serves the explanation of economic facts.New facts need new theory.This paper intends to analyze the international financial adjustment statistically,theoretically and empirically by sloving the following questions: First,who gains and who loss during the international financial adjustment process.We make a statistical analysis of basic facts of the global financial adjustment since the rise of financial globalization in 1980 s,and abstract the rule of benefits distribution across different countries under the international financial adjustment channel.We use latest panel data to analyze the scale of financial adjustment,characterize the role of financial channels in the external adjustment from a global perspective.We construct statistics to analyze the dispersion of financial adjustment channel and find that the benefits of financial adjustment is highly concentrated in a small number of countries,which verify the extrobitant privilege of the major reserve currency.Borrowing a new method of decomposition,we decompose financial adjustment into four parts: the initial stock factor,exchange rate factor,compositon factor and return factor,and analyze the structure of financial adjustment channel.We then discuss why some countries could earn higher return through the financial adjustment channel.Second,we analyze the long-term macroeconomic impact of financial adjustment channels.The valuation effects in the financial adjustment channel is usually considered to be an unrealized profits or losses,which is book gain or book loss and is therefore not taken seriously.Here we build a small open economy model,introducing financial friction of borrowing constraint,solving the intertemporal optimal choice condition of the representative household,and discovering that in steady state,the lower external positon return is,the country tends to save more and runs current account suplus.Using cross-country panel data,we demonstrate that the financial adjustment channels have a long-term significant effect on savings and current accounts.This means that the financial adjustment channel has real economic effect,not just book gain or loss.When we think about the factors which influence the current accouts,the external returns should be concerned.If we want solve the current accounts imbalance,adjustment of the external returns should also be a way.Third,we analyze the impact of financial adjustment channels on short-term macroeconomic fluctuations.The sector level valuation effects,especially the valuation effects of financial intermediaries can have significant impact on the real economy,yet not be carefully analyzed empirically due to the lack of sufficient time series data across countries.Here we use a New Keynesian DSGE model with fianancial intermediaries and financial frictions to evaluate the short term macroeconomic effects of financial adjustment channel.Exchange rate fluctuations impact the balance sheets of financial intermediaries,relaxing or tightening the financial constraints of them,and then have a siginificant effect on the real economy.The currency of emerging markets is not international currency,which known as the “original sin”.When the global liquidity tightens,the monetary policy of EMEs may face a dilemma under the effects of financial adjustment: on the one hand,the foreign interest rate raises causes domestic currency depreication and domestic inflation going up,thus central bank have to increase policy rate to curb inflation;on the other hand,the increase of nominal interest rate and depreciation of exchange rate will work together to deteriorate the balance sheet of financial intermediations,contracting the credit and push the economy in to recession.Fourth,we discuss the size and structure China’s financial adjustment.Official international intestment position data of China offers a relative short time series which starts from 2004.Moreover,the valuation methods and statistical caliber of some items changed at some points,which make the time series inconsistent to measure the financial adjustment accuratlly.Besides,the existing literatures which estimate IIP of China also have some drawbacks due to the inaccuracy of early stock and flow data.With the latest published data and using a modified method,we re-estimate China’s international investment position data from 1982 to 2014,and then analyze China’s financial adjustment.We find that official data may underestimate the financial adjustment loss of China.We calculate returns of each type of asset and liability and find that the excess return within each type of asset and liability is also an important cause for financial adjustment loss of China.To prevent China’s financial adjustment loss from deteriorating,we propose to adjust structure of IIP,internationalize RMB and domestic financial markets and improve the global governance to change the dominance of USD.