How Nominal Foreign Currency Depreciation Against the U.S. Dollar Affects U.S. Wealth: Working Paper 2018-05

By Dorian Carloni (CBO)

Foreign currency depreciation against the U.S. dollar would affect the wealth holdings of U.S. residents in several ways. Specifically, I analyze the effects of a one-time large depreciation of 20 percent. If foreign currencies depreciated by 20 percent against the U.S. dollar, the value of U.S. holdings of foreign assets would decrease by an estimated $2,451 billion and the value of U.S. liabilities to foreigners by $168 billion (values are based on 2015 holdings and values). On net, the total worth of U.S. households would decrease by $2.3 trillion—a drop of 2.2 percent. Second, the wealth effect would be larger for equity held in foreign direct investment (FDI) and foreign portfolio assets than for debt assets: FDI assets would decrease in value by $907 billion; portfolio equity assets, by $1,222 billion; and foreign debt assets, by $246 billion. Third, the gross wealth effect of the exchange rate adjustment would be largely concentrated in the top income decile of U.S. households. If foreign currencies were to depreciate by 20 percent in relation to the U.S. dollar, the dollar value of U.S. holdings of foreign assets would decrease by $1,503 billion for households in the top income decile, compared with $336 billion for households in the ninth income decile and $10 billion for households in the bottom income decile. As a result, the value of total assets held would decrease by 2.2 percent for the top income decile, by 2.3 percent for the ninth decile, and by 1.1 percent for the bottom income decile. Some simplifying assumptions underlie those results, thereby limiting their application. However, the results are nonetheless useful for thinking about the distributional effects of policies affecting the nominal exchange rate. This paper gives an example of such a policy: a border adjustment tax.