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Cross-border returns differentials

  • Stephanie E. Curcuru
  • Tomas Dvorak
  • Francis E. Warnock
Registered author(s):

    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, we find that the returns differential of U.S. claims over U.S. liabilities is far smaller than previously reported and, importantly, is near zero for portfolio equity and debt securities. ; > For portfolio securities, we confirm our finding using a separate dataset on the actual foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors; 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. Finally, we reconcile our finding of a near zero returns differential with observed patterns of cumulated current account deficits, the net international investment position, and the net income balance.

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    File URL: http://dallasfed.org/assets/documents/institute/wpapers/2007/0004.pdf
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    Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 04.

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    Date of creation: 2007
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    Handle: RePEc:fip:feddgw:04
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    1. Pierre-Olivier Gourinchas & Helene Rey, 2005. "International Financial Adjustment," NBER Working Papers 11155, National Bureau of Economic Research, Inc.
    2. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "Financial globalization and exchange rates," LSE Research Online Documents on Economics 19926, London School of Economics and Political Science, LSE Library.
    3. Michele Cavallo & Cedric Tille, 2006. "Could capital gains smooth a current account rebalancing?," 2006 Meeting Papers 252, Society for Economic Dynamics.
    4. 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.
    5. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2005. "A Global Perspective on External Positions," CEPR Discussion Papers 5234, C.E.P.R. Discussion Papers.
    6. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2007. "The Valuation Channel of External Adjustment," NBER Working Papers 12937, National Bureau of Economic Research, Inc.
    7. Devereux, Michael B & Saito, Makoto, 2006. "A Portfolio Theory of International Capital Flows," CEPR Discussion Papers 5746, C.E.P.R. Discussion Papers.
    8. Christopher M. Meissner & Alan M. Taylor, 2006. "Losing our marbles in the new century?: the great rebalancing in historical perspective," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 51.
    9. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2007. "The Stability of Large External Imbalances: The Role of Returns Differentials," NBER Working Papers 13074, National Bureau of Economic Research, Inc.
    10. Eric Van Wincoop & Cedric Tille, 2007. "International Capital Flows," NBER Working Papers 12856, National Bureau of Economic Research, Inc.
    11. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2007. "The stability of large external imbalances: the role of returns differentials," International Finance Discussion Papers 894, Board of Governors of the Federal Reserve System (U.S.).
    12. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2009. "Where did all the borrowing go? A forensic analysis of the U.S. external position," Journal of the Japanese and International Economies, Elsevier, vol. 23(2), pages 177-199, June.
    13. G Alogoskoufis & R Portes & H Rey, 1998. "The Emergence of the Euro as an International Currency," CEP Discussion Papers dp0388, Centre for Economic Performance, LSE.
    14. Enrique G. Mendoza, 2007. "Financial Integration, Financial Deepness and Global Imbalance," 2007 Meeting Papers 746, Society for Economic Dynamics.
    15. Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2006. "The Performance of International Equity Portfolios," NBER Working Papers 12346, National Bureau of Economic Research, Inc.
    16. John D. Burger & Francis E. Warnock, 2004. "Foreign participation in local-currency bond markets," International Finance Discussion Papers 794, Board of Governors of the Federal Reserve System (U.S.).
    17. Barry Bosworth & Susan Collins & Gabriel Chodorow-Reich, . "Returns on FDI. Does the U.S. Really Do Better?," Working Paper 90801, Harvard University OpenScholar.
    18. repec:tcd:wpaper:tep16 is not listed on IDEAS
    19. Jeffrey R. Brown & Courtney C. Coile & Scott J. Weisbenner, 2006. "The Effect of Inheritance Receipt on Retirement," NBER Working Papers 12386, National Bureau of Economic Research, Inc.
    20. Kristin J. Forbes, 2007. "Global Imbalances: A Source of Strength or Weakness?," Cato Journal, Cato Journal, Cato Institute, vol. 27(2), pages 193-202, Spring/Su.
    21. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2006. "Look at Me Now: What Attracts U.S. Shareholders?," NBER Working Papers 12500, National Bureau of Economic Research, Inc.
    22. Charles P. Thomas, 2006. "The Performance of International Equity Portfolios," The Institute for International Integration Studies Discussion Paper Series iiisdp162, IIIS.
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