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On returns differentials

  • Curcuru, Stephanie E.
  • Thomas, Charles P.
  • Warnock, Francis E.
Registered author(s):

    Estimates of U.S. returns differentials have ranged from exorbitant to quite small, in part because of their volatility coupled with the relatively short time series available. We shed light on underlying drivers of returns differentials by presenting a number of decompositions: a by-asset-class decomposition into yields and capital gains, the Gourinchas and Rey (2007a) composition and return effects, and further decompositions of capital gains that focus on exchange rate effects. While each decomposition informs thinking about returns differentials, one constant is evident throughout: to date the existing differential favoring the U.S. has owed primarily to one factor, a differential in direct investment yields. We discuss how our analysis informs the income puzzle (of positive net income flows to the U.S. even as its net international investment position is negative and substantial) and the position puzzle (of a sizeable gap between the reported U.S. net international position and cumulated current account deficits), provide an initial assessment of the literature on the dynamics of returns differentials, and present a framework to guide a forward-looking view of how returns differentials might evolve in the future.

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    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 36 (2013)
    Issue (Month): C ()
    Pages: 1-25

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    Handle: RePEc:eee:jimfin:v:36:y:2013:i:c:p:1-25
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    1. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International Financial Adjustment," International Finance 0505004, EconWPA.
    2. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege," NBER Working Papers 11563, National Bureau of Economic Research, Inc.
    3. Philip R. Lane & Gian Maria Milesi-Ferretti, 2009. "Where did all the borrowing go? A forensic analysis of the U.S. external position," NBER Chapters, in: Financial Globalization, 20th Anniversary Conference, NBER-TCER-CEPR National Bureau of Economic Research, Inc.
    4. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock, 2009. "Current Account Sustainability and Relative Reliability," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 67-109 National Bureau of Economic Research, Inc.
    5. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "A Global Perspective on External Positions," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 67-102 National Bureau of Economic Research, Inc.
    6. Ellen R. McGrattan & Edward C. Prescott, 2009. "Technology capital and the U.S. current account," Staff Report 406, Federal Reserve Bank of Minneapolis.
    7. Christopher M. Meissner & Alan M. Taylor, 2006. "Losing our Marbles in the New Century? The Great Rebalancing in Historical Perspective," NBER Working Papers 12580, National Bureau of Economic Research, Inc.
    8. Maurice Obstfeld, 2012. "Does the Current Account Still Matter?," NBER Working Papers 17877, National Bureau of Economic Research, Inc.
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    23. José L. Fillat & Stefania Garetto, 2010. "Risk, returns, and multinational production," Risk and Policy Analysis Unit Working Paper QAU10-5, Federal Reserve Bank of Boston.
    24. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-border returns differentials," International Finance Discussion Papers 921, Board of Governors of the Federal Reserve System (U.S.).
    25. Habib, Maurizio Michael, 2010. "Excess returns on net foreign assets: the exorbitant privilege from a global perspective," Working Paper Series 1158, European Central Bank.
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