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Excess returns on net foreign assets: the exorbitant privilege from a global perspective

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  • Habib, Maurizio Michael

Abstract

This paper studies net foreign assets and the differential returns between gross foreign assets and liabilities for a sample of 49 countries between 1981 and 2007. It shows that investment income is more important than capital gains in imparting a drift to net foreign assets over the long-run, whereas the latter dominate short-term dynamics. Excess returns on net foreign assets of the United States are indeed exorbitant from a global perspective, only occasionally matched by other countries and mainly accounted for by positive valuation effects. The role of the United States as levered investor did not contribute to its exorbitant privilege. The econometric panel analysis also fails to find a robust positive relationship between leverage and excess returns. Notably, instead, real exchange rate depreciations increase excess returns through capital gains, proportionally to the relative foreign currency exposure. Excess yields on investment income are positively associated with the country risk rating. JEL Classification: F30, F31, F36

Suggested Citation

  • Habib, Maurizio Michael, 2010. "Excess returns on net foreign assets: the exorbitant privilege from a global perspective," Working Paper Series 1158, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20101158
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ca’ Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2012. "Thousands of models, one story: Current account imbalances in the global economy," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1319-1338.
    2. Rogoff, Kenneth S. & Tashiro, Takeshi, 2015. "Japan’s exorbitant privilege," Journal of the Japanese and International Economies, Elsevier, vol. 35(C), pages 43-61.
    3. D.D. Evans, Martin, 2017. "External balances, trade and financial conditions," Journal of International Economics, Elsevier, vol. 107(C), pages 165-184.
    4. V. Vicard, 2015. "Profit shifting through transfer pricing: evidence from French firm level trade data," Working papers 555, Banque de France.
    5. Mileva, Mariya, 2015. "Valuation effects and long-run real exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 390-408.
    6. Curcuru, Stephanie E. & Thomas, Charles P. & Warnock, Francis E., 2013. "On returns differentials," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 1-25.
    7. Martin D Evans, 2012. "International Capital Flows and Debt Dynamics," IMF Working Papers 12/175, International Monetary Fund.
    8. Martin Schmitz, 2014. "Financial remoteness and the net external position," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(1), pages 191-219, February.
    9. McCauley, Robert N., 2015. "Does the US dollar confer an exorbitant privilege?," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 1-14.
    10. Zorell, Nico, 2017. "Large net foreign liabilities of euro area countries," Occasional Paper Series 198, European Central Bank.

    More about this item

    Keywords

    excess returns; exorbitant privilege; leverage; net foreign assets;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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