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Reducing large net foreign liabilities


  • Fidora, Michael
  • Schmitz, Martin
  • Tcheng, Céline


In light of persistently large net foreign liability NFL) positions in several euro area countries, we analyse 138 episodes of sizeable NFL reductions for a broad sample of advanced and emerging economies. We provide stylised facts on the channels through which NFLs were reduced and estimate factors which make episodes ‘stable’, i.e. sustained over the medium term. Our findings show that while GDP growth and valuation effects contribute most to NFL reductions overall, stable reduction episodes also require positive transaction effects (i.e. current account surpluses), in particular in advanced economies. Considering the different components of a country’s external balance sheet, we observe that reduction episodes were almost exclusively driven by a decline in gross external liabilities in emerging economies, while in advanced economies also gross external asset accumulation contributed significantly, in particular in stable episodes. Our econometric analysis shows that NFL reductions are more likely to be sustained if a country records strong average real GDP growth during an episode and exits the episode with a larger current account surplus. Moreover, we find evidence that nominal effective exchange rate depreciation during an episode is helpful for achieving episode stability in the short run, while IMF programmes and sovereign debt restructurings also contribute to longer term stability. JEL Classification: F21, F32, F34

Suggested Citation

  • Fidora, Michael & Schmitz, Martin & Tcheng, Céline, 2017. "Reducing large net foreign liabilities," Working Paper Series 2074, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20172074

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    References listed on IDEAS

    1. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    2. repec:tcd:wpaper:tep16 is not listed on IDEAS
    3. 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.
    4. S. M. Ali Abbas & Bernardin Akitoby & Jochen R. Andritzky & Helge Berger & Takuji Komatsuzaki & Justin Tyson, 2013. "Dealing with High Debt in an Era of Low Growth," IMF Staff Discussion Notes 13/7, International Monetary Fund.
    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.
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    Cited by:

    1. Katharina Bergant, 2017. "The Role of Stock-Flow Adjustment during the Global Financial Crisis," Trinity Economics Papers tep1317, Trinity College Dublin, Department of Economics.
    2. Zorell, Nico, 2017. "Large net foreign liabilities of euro area countries," Occasional Paper Series 198, European Central Bank.

    More about this item


    external adjustment; external imbalances; net foreign assets; stock imbalances; valuation effects;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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