A Study on the Impact of Valuation Effect on the Ability to Delay Capacity of the Balance of Payments
LI He LI Jing JIANG Xueqing
School of Finance, Hebei University of Economics and Business; School of Economics, Capital University of Economics and Business; Research Institute, the People's Bank of China
Summary:
Balance of payments equilibrium as an essential objective of macroeconomics is of great significance for promoting internal and external economic balance, safeguarding national economic security, and ensuring financial stability. The United States. has sustained persistent “twin deficits” in its current account and fiscal balance without triggering a balance of payments crisis. The key to this puzzle lies in the delay capacity of balance of payments. Capital gains driven by valuation effects bolster the U.S. external solvency, relax its financial constraints, and enhance debt repayment capacity. This mechanism postpones necessary balance-of-payments adjustments, thereby reinforcing the exorbitant privilege of the U.S. dollar and perpetuating America's “BoP deficit without tears”, and the U.S. monetary policy adjustment will generate wide spillover effect to other countries. In context of “two overall situations”, China is facing up challenges in achieving “dual circulation”. On the one hand, economic and trade frictions between the United States and China escalated, however, bilateral economic ties between the two countries are too connected to decouple. The changes in the U.S. balance-of-payment adjustment policies directly impact China's external economy. By analyzing how the valuation effects influence the delay capacity of balance of payments, a deeper understanding of the delayed privilege that the valuation effect confer on the United States under the current international monetary system, can facilitate accurate assessment of global economic trends and effectively, manage the spillover effects of the U.S. policy adjustments; On the other hand, China is at a critical stage in transferring to a mature creditor country, marked by significant structural shifts in its balance of payments. The decline in current account surplu may become normal in the future. Enhancing China's delay capacity of the balance of payments can help buffer against external risks, promote the domestic and international dual circulation, therefore achieve the internal and external balance. This paper explores the theoretical modeling and empirical analysis to examine the logical relationships between valuation effects and external imbalances / delay capacity of balance of payments. Firstly, based on an intertemporal budget constraint framework, this paper demonstrates that positive valuation effects contribute to smoothing negative external imbalances and enhance a nation's delay capacity of balance of payments. Secondly, by utilizing macroeconomic data from the External Wealth of Nations Database, World Development Indicators, and Federal Reserve Economic Data, the paper constructs a panel dataset covering 50 economies from 1990 to 2020, empirically testing the valuation effects' impact on external imbalances and delay capacity of balance of payments. The heterogeneity analysis reveals that, in terms of the sources of valuation effects, the impact of exchange rate and filed factors on delay capacity exhibits more significant. In terms of asset category, equity net assets are crucial for strengthening the valuation effects and thus the delay capacity. In terms of country types, the countries with low economic growth, high political risk and high dependency ratio, the negative valuation effects have a more significant impact on reducing the delay capacity of balance of payments. The empirical findings further confirm the spillover effects of the U.S. policy adjustments on peripheral economies under the international monetary system, as well as how these countries can enhance their own delay capacity of the balance of payments. By absorbing capital gains from emerging markets and the low and middle-income countries,the U.S. monetary policy adjustments can temporarily impact the valuation effects of these countries, enhance its own balance of payments resilience while weaken the others' delay capacity to adjustment, thus maintaining the U.S. “BoP deficit without tear”. This highlights the asymmetry in global economic rebalancing. Other countries can enhance its delay capacity by valuation effects by strengthening monetary policy independence, improving official asset structure (e.g. increasing gold reserves) and enhancing the exchange rate flexibility, enlarge the improvement of valuation effect in delay capacity. This paper ’s marginal contributions to current literature are reflected in three key aspects. Firstly, it enriches the theory of global economic rebalancing and validate the core of U.S. delay capacity of balance of payments and the economic logic behind a“deficit without tear”. Secondly, it identifies the long-term mechanism underlying the “deficit without tears” in the U.S. balance of payments and proposes that asset price volatility is the core determinant of the delay capacity. Thirdly, it highlights the asymmetry and unfairness of global imbalances, offers crucial insights into the redistribution effects of global balance of payments rebalancing, and provides a reference for peripheral economies in the international monetary system (including China) in maintaining the internal and external economic balance. The policy implications of this paper are as follows. Firstly, the valuation effects can temporarily adjust the external imbalances, but in the long run, the result of valuation effects is equilibrium and the improvement of real economic structure is the key to rebalancing; Secondly, a country can optimize its asset and liability structure to reduce the influence from negative valuation effects caused by core countries' monetary policy adjustments, alleviate their own external adjustment pressure, better smooth financial market fluctuations, and ensure sustainable economic development; Thirdly, the responsibility for rebalancing global imbalances is unevenly distributed, with the delayed capacity of core countries such as the United States moves burden on other countries. Given China's significant role in global trade and investment networks, in the long term, China should not only share the responsibility of adjustment and also insist on relying on multilateral platforms to play a role in global macroeconomic policy coordination; Fourthly, for China and other emerging market economies, improving currency status and monetary functions may be conducive to external economic rebalancing. In this context,strengthening the Renminbi's functions as international currency are the key efforts to promote high-level financial openness, build a strong financial country, and achieve Chinese-style modernization.
李贺, 李婧, 姜雪晴. 估值效应对国际收支延迟调整能力的影响研究[J]. 金融研究, 2025, 539(5): 1-20.
LI He LI Jing JIANG Xueqing. A Study on the Impact of Valuation Effect on the Ability to Delay Capacity of the Balance of Payments. Journal of Financial Research, 2025, 539(5): 1-20.
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