Exchange rate movements play an important role in explaining the development und fluctuation in national and sectoral gross and net wealth and the rate of return on foreign investments. The German international investment position (IIP) statistics has for a long time provided and published data on assets and liabilities with foreign counterparties by sector and by financial instruments. For the time since 2012, all items can additionally be broken down according to seven currencies: Euro and six non-Euro denominations. Ex post, this allows calculating the effect of exchange rate changes on the Euro value of assets and liabilities, enabling a wide range of analytical work. These exchange rate changes are now collected in an index of exchange rate effects in the IIP, which depicts the influence of individual exchange rate movements on all non-derivative assets and liabilities in the external position on an aggregated level as well as on various disaggregated levels. Ex ante, it is possible to conduct partial sensitivity-analyses of exchange rate shocks. Furthermore, the extended IIP approach can under certain qualifying assumptions be used to indicate currency mismatches and potential imbalances and as a basis for delving deeper into sectoral currency risk exposure and potential vulnerabilities on the aggregate level.
International spillovers of financial shocks can be transmitted by a variety of channels, among them direct financial interlinkages and demand effects. The exchange rate is a summary relative price for traded goods and services as well as for real and financial assets. Thus it will steer trade and financial flows and determine the relative wealth of people, sectors and nations, including their state of solvency. The Asian crisis started out as a series of currency devaluations that triggered stock market declines and made foreign debt positions of a number of countries unsustainable.
The IIP is to national wealth what the current account is to GNP: national wealth is the sum of real capital plus the net foreign position of a country. Thus, in order to categorize and analyse wealth effects of exchange rate fluctuations, the IIP is the point of departure. Obviously, wealth effects of exchange rate movements on countries, sectors and individuals depend to a large extend not only on their overall gross and net financial positions but also on the currency denomination of their portfolio.
Our paper gives a methodological exposition on analysing the instantaneous valuation effects, with a focus on the German IIP. As the statistical data compilation in Germany is methodologically guided by the IMF BPM6 directives which apply world-wide, it can be expected that this type of analysis is feasible in many other countries.