Working Papers in Trade and Development Valuation ) Effects , ) Risk ) Sharing , ) and ) Consumption ) Smoothing ) Marcel )

In theory, valuation effects (changes in net external assets of a country arising from movements in exchange rates or asset returns) are an important channel of international risk sharing as they facilitate external adjustment. However, the effects can also be economically destabilizing in the presence of frictions in the international financial system. Despite the growing significance of valuation effects in an era of financial globalization, the nature and extent of their macroeconomic effect has not yet been systematically examined, especially in relation to emerging market economies (EMEs). The study examines the macroeconomic impact of valuation effects for 53 countries from 1980–2010. Valuation effects seem to operate as a risk sharing channel in high income countries. For EMEs the results depend on how valuation effects correlate with domestic consumption growth. There is weak evidence that valuation effects act as a risk sharing channel only if the correlation is negative, and are destabilizing otherwise.