Benchmarks for Net International Investment Positions

Applied analysis aimed at assessing which value of the NIIP is appropriate for a given country is relatively scarce, and the few existing papers on the topic estimate one-size-fits-all NIIP benchmarks (e.g., Catão and Milesi-Ferretti, 2014). This paper estimates country-specific NIIP benchmarks on a sample of 65 advanced and emerging economies according to two different criteria: consistency with economic fundamentals (NIIP norms, obtained as cumulated current account norms) and prudence against the risk of external crises (NIIP prudential thresholds, obtained as the threshold of the NIIP variable interacted with relative income per capita that maximises signal power in predicting external crises). The median for the country-specific NIIP norms is around -17% of GDP, while the median for prudential threshold is about -44%. The two benchmarks are negatively correlated across countries, highlighting a tension between factors underpinning the scope for external borrowing and debt tolerance. Gaps between actual and NIIP benchmarks are highly persistent, but help predicting subsequent medium-term NIIP changes better than the NIIP level, thus confirming the usefulness of country-specific reference values. The adjustment of the NIIP in response to NIIP gaps is asymmetric, with a significant adjustment limited to negative gaps, with the exception of countries with a positive net position in foreign currency.