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Cross-border returns differentials

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  • Stephanie E. Curcuru
  • Tomas Dvorak
  • Francis Warnock
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    Abstract

    Were the U.S. to persistently earn substantially more on its foreign investments ("U.S. claims") than foreigners earn on their U.S. investments ("U.S. liabilities"), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, we find that the returns differential of U.S. claims over U.S. liabilities is far smaller than previously reported and, importantly, is near zero for portfolio equity and debt securities. ; > For portfolio securities, we confirm our finding using a separate dataset on the actual foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors; in the context of equity and bond portfolios we find no evidence that the U.S. can count on earning more on its claims than it pays on its liabilities. Finally, we reconcile our finding of a near zero returns differential with observed patterns of cumulated current account deficits, the net international investment position, and the net income balance.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 04.

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    Date of creation: 2007
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    Handle: RePEc:fip:feddgw:04

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    Keywords: International finance;

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    1. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege," CEPREMAP Working Papers (Docweb) 0606, CEPREMAP.
    2. Mendoza, Enrique G & Quadrini, Vincenzo & Ríos-Rull, José-Víctor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6149, C.E.P.R. Discussion Papers.
    3. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2007. "The Stability of Large External Imbalances: The Role of Returns Differentials," NBER Working Papers 13074, National Bureau of Economic Research, Inc.
    4. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp124, IIIS.
    5. Jaewoo Lee & Fabio Ghironi & Alessandro Rebucci, 2009. "The Valuation Channel of External Adjustment," IMF Working Papers 09/275, International Monetary Fund.
    6. Charles P. Thomas, 2006. "The Performance of International Equity Portfolios," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp162, IIIS.
    7. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2006. "Look at Me Now: What Attracts U.S. Shareholders?," NBER Working Papers 12500, National Bureau of Economic Research, Inc.
    8. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "International Financial Adjustment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4923, C.E.P.R. Discussion Papers.
    9. Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers, Trinity College Dublin, Department of Economics 2000516, Trinity College Dublin, Department of Economics.
    10. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, Elsevier, vol. 80(2), pages 157-175, March.
    11. John D. Burger & Francis E. Warnock, 2004. "Foreign participation in local-currency bond markets," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 794, Board of Governors of the Federal Reserve System (U.S.).
    12. Jeffrey R. Brown & Courtney C. Coile & Scott J. Weisbenner, 2010. "The Effect of Inheritance Receipt on Retirement," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 425-434, May.
    13. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2008. "Where Did All the Borrowing Go? a Forensic Analysis of the U.S. External Position," IMF Working Papers 08/28, International Monetary Fund.
    14. Philip R. Lane & G Milesi-Feretti, 2004. "Financial Globalization and Exchange Rates," CEP Discussion Papers dp0662, Centre for Economic Performance, LSE.
    15. Michele Cavallo & Cédric Tille, 2006. "Could capital gains smooth a current account rebalancing?," Working Paper Series, Federal Reserve Bank of San Francisco 2006-03, Federal Reserve Bank of San Francisco.
    16. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2007. "The stability of large external imbalances: the role of returns differentials," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 894, Board of Governors of the Federal Reserve System (U.S.).
    17. Richard Portes & Hélène Rey, 1998. "The emergence of the euro as an international currency," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(26), pages 305-343, 04.
    18. repec:tcd:wpaper:tep16 is not listed on IDEAS
    19. Meissner, Christopher M & Taylor, Alan M, 2006. "Losing our Marbles in the New Century? The Great Rebalancing in Historical Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5917, C.E.P.R. Discussion Papers.
    20. Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2006. "The Performance of International Equity Portfolios," NBER Working Papers 12346, National Bureau of Economic Research, Inc.
    21. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "Financial globalization and exchange rates," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19926, London School of Economics and Political Science, LSE Library.
    22. Kristin J. Forbes, 2007. "Global Imbalances: A Source of Strength or Weakness?," Cato Journal, Cato Journal, Cato Institute, vol. 27(2), pages 193-202, Spring/Su.
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    Cited by:
    1. Christian Thimann, 2008. "Global Roles of Currencies," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 11(3), pages 211-245, December.
    2. Evans, Martin, 2014. "External Balances, Trade Flows and Financial Conditions," MPRA Paper 55644, University Library of Munich, Germany.

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