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On the determinants of external imbalances and net international portfolio flows - a global perspective

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Author Info
Roberto A. De Santis () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Melanie Lührmann () (Institute for Fiscal Studies, 7, Ridgmount Street, WC1E 7AE London, United Kingdom.)

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Abstract

In a panel covering a large number of countries from 1970 to 2003, we show that net portfolio flows play an important role in correcting external imbalances, since they are driven by common determinants represented by countries’ demographic profiles, the quality of institutions, monetary aggregates and initial net financial asset positions. Population ageing causes current account deficits, net equity inflows and net outflows in debt instruments. A higher money to GDP ratio – associated with lower interest rates – favours international investments in domestic stocks to the detriment of the less attractive domestic bonds. Additionally, current account balances are driven negatively by real GDP growth, losses in competitiveness and increases in the quality of the institutions; net equity flows are driven positively by the quality of the institutions and negatively by per capita income; while net flows in debt instruments are driven by long-term interest rate differentials and deviations from the UIP. JEL Classification: F21, F32, F41, O16.

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Paper provided by European Central Bank in its series Working Paper Series with number 651.

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Length: 55 pages
Date of creation: Jul 2006
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Handle: RePEc:ecb:ecbwps:20060651

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Keywords: Current accounts; net portfolio flows; panel regressions.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Joshua Aizenman & Yothin Jinjarak, 2008. "The US as the "Demander of Last Resort" and its Implications on China's Current Account," NBER Working Papers 14453, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Roberto A. De Santis & Bruno Gérard, 2006. "Financial integration, international portfolio choice and the European Monetary Union," Working Paper Series 626, European Central Bank. [Downloadable!]
  3. Roberto A. De Santis, 2006. "The geography of international portfolio flows, international CAPM and the role of monetary policy frameworks," Working Paper Series 678, European Central Bank. [Downloadable!]
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