What a valuation effect is

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Consider a country with foreign assets A = 100% of GDP and foreign liabilities L = 150% of GDP. Foreign liabilities are entirely in home currency (dollar). Half of foreign assets are in dollars and the other half in foreign currency. Imagine the dollar appreciates by 10%, resulting in a valuation effect on the net foreign asset position of the country. Explain what a valuation effect is and why it is associated with an international wealth transfer? What is the size of the international wealth transfer from a 10% dollar appreciation? Who benefits from the dollar appreciation, home or foreign investors? When do such situations typically occur?

Reference no: EM133133215

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