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Cross-border returns differentials

  • Stephanie E. Curcuru
  • Tomas Dvorak
  • Francis 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 & Hélène Rey, 2005. "International Financial Adjustment," International Finance 0505004, EconWPA.
    2. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2005. "Financial Globalization and Exchange Rates," IMF Working Papers 05/3, International Monetary Fund.
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    4. Mendoza, Enrique G & Quadrini, Vincenzo & Ríos-Rull, José-Víctor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers 6149, C.E.P.R. Discussion Papers.
    5. Cédric Tille & Eric van Wincoop, 2007. "International capital flows," Staff Reports 280, Federal Reserve Bank of New York.
    6. 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.
    7. Alogoskoufis, G. & Portes, R. & Rey, H., 1997. "The Emergence of the Euro as an International Currency," DELTA Working Papers 97-28, DELTA (Ecole normale supérieure).
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    13. Burger, John D. & Warnock, Francis E., 2007. "Foreign participation in local currency bond markets," Review of Financial Economics, Elsevier, vol. 16(3), pages 291-304.
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    15. 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.
    16. 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.).
    17. repec:tcd:wpaper:tep16 is not listed on IDEAS
    18. Charles P. Thomas, 2006. "The Performance of International Equity Portfolios," The Institute for International Integration Studies Discussion Paper Series iiisdp162, IIIS.
    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.
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    21. 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.
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