DP4745 Financial Globalization and Exchange Rates

Author(s): Philip R. Lane , Gian Maria Milesi-Ferretti

Publication Date: November 2004

Keyword(s): financial integration , capital flows , external assets and liabilities

JEL(s): F31 , F32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4745.asp

The founders of the Bretton Woods System sixty years ago were primarily concerned with orderly exchange rate adjustment in a world economy that was characterized by widespread restrictions on international capital mobility. In contrast, the rapid pace of financial globalization during recent years poses new challenges for the international monetary system. In particular, large gross cross-holdings of foreign assets and liabilities means that the valuation channel of exchange rate adjustment has grown in importance, relative to the traditional trade balance channel. Accordingly, this Paper empirically explores some of the inter-connections between financial globalization and exchange rate adjustment and discusses the policy implications.