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The Stability of Large External Imbalances: The Role of Returns Differentials

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Author Info
Stephanie E. Curcuru
Tomas Dvorak
Francis E. 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, utilizing data on the actual foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors, we find that the returns differential of U.S. claims over U.S. liabilities is essentially zero. Ending our sample in 2005, the differential is positive, whereas through 2004 it is negative; in both cases the differential is statistically indecipherable from zero. Moreover, were it not for the poor timing of investors from developed countries, who tend to shift their U.S. portfolios toward (or away from) equities prior to the subsequent underperformance (or strong performance) of equities, the returns differential would be even lower. Thus, 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13074.

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Date of creation: May 2007
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Handle: RePEc:nbr:nberwo:13074

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F3 - International Economics - - International Finance

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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.:
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  4. Philip Lane & Gian Maria Milesi-Ferretti, 2005. "A Global Perspective on External Positions," The Institute for International Integration Studies Discussion Paper Series iiisdp079, IIIS. [Downloadable!]
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  5. Pierre-Olivier Gourinchas & Hélène Rey, 2006. "International Financial Adjustment," Center for International and Development Economics Research, Working Paper Series 1057, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  6. Michele Cavallo & Cedric Tille, 2006. "Could capital gains smooth a current account rebalancing?," Staff Reports 237, Federal Reserve Bank of New York. [Downloadable!]
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  7. Charles P. Thomas, 2006. "The Performance of International Equity Portfolios," The Institute for International Integration Studies Discussion Paper Series iiisdp162, IIIS. [Downloadable!]
  8. Ferson, Wayne & Khang, Kenneth, 2002. "Conditional performance measurement using portfolio weights: evidence for pension funds," Journal of Financial Economics, Elsevier, vol. 65(2), pages 249-282, August. [Downloadable!] (restricted)
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  10. Tomas Dvorak, . "Do Domestic Investors Have an Information Advantage? Evidence from Indonesia," Center for Development Economics 168, Department of Economics, Williams College. [Downloadable!]
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  12. Cedric Tille, 2005. "Financial integration and the wealth effect of exchange rate fluctuations," Staff Reports 226, Federal Reserve Bank of New York. [Downloadable!]
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  13. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege," CEPR Discussion Papers 5220, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2005-1), pages 67-146. [Downloadable!]
  15. Devereux, Michael B & Saito, Makoto, 2006. "A Portfolio Theory of International Capital Flows," CEPR Discussion Papers 5746, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  16. Wayne Ferson & Kenneth Khang, 2002. "Conditional Performance Measurement Using Portfolio Weights: Evidence for Pension Funds," NBER Working Papers 8790, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2006. "The Valuation Channel of External Adjustment," 2006 Meeting Papers 195, Society for Economic Dynamics. [Downloadable!]
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  18. Cédric Tille & Eric van Wincoop, 2007. "International capital flows," Staff Reports 280, Federal Reserve Bank of New York. [Downloadable!]
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  19. Ferson, Wayne E & Schadt, Rudi W, 1996. " Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, vol. 51(2), pages 425-61, June. [Downloadable!] (restricted)
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  21. repec:tcd:wpaper:tep16 is not listed on IDEAS
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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. 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. [Downloadable!]
    Other versions:
  2. Barry Bosworth & Susan M. Collins & Gabriel Chodorow-Reich, 2007. "Returns on FDI: Does the U.S. Really Do Better?," NBER Working Papers 13313, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Stephanie E. Curcuru & Tomas Dvorak & Francis Warnock, 2007. "Cross-border returns differentials," Globalization and Monetary Policy Institute Working Paper 04, Federal Reserve Bank of Dallas. [Downloadable!]
  4. Sirsha Chatterjee & Kanda Naknoi, 2007. "The Marginal Product of Capital, Capital Flows and Convergence," Purdue University Economics Working Papers 1202, Purdue University, Department of Economics. [Downloadable!]
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