Valuation effects with transitory and trend productivity shocks

► Whether valuation effects are stabilizing or not depends on the nature of underlying productivity shocks. ► In response to transitory shocks, valuation effects are stabilizing. ► In response to trend shocks, valuation effects amplify the impact of the current account on NFA position. ► The result is illustrated by the pattern of external imbalances between the U.S. and other G7 countries since the 1990s. ► Longer data on G7 countries also support the result.