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International Capital Flows and Debt Dynamics

This paper presents a new model for studying international capital flows and debt dynamics. The model emphasizes the role of expectations concerning future trade flows and returns as the determinants of a country's foreign asset and liability positions, and how revisions in these expectations drive gross and net capital flows. I use the model to estimate the drivers of the U.S. external position and capital flows between 1973 and 2008. The estimates show that most of the secular rise in U.S. international indebtedness is attributable to growing optimism about future returns on U.S. holdings of foreign equity and FDI assets. Expectations concerning future returns are also the most important determinant of net capital flows, but the flows themselves are not important drivers of the U.S. external position. My estimates also show that the transformation of world savings into risky assets by the U.S. had little effect on its external position, but the expected real depreciation of the dollar allowed the U.S. to sustain a much higher level of international debt after the 1990s.

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~12-12-04.

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Date of creation: 04 Jan 2012
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Handle: RePEc:geo:guwopa:gueconwpa~12-12-04
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Georgetown University Department of Economics Washington, DC 20057-1036

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Web page: http://econ.georgetown.edu/
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Order Information: Postal: Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036
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  1. Maurice Obstfeld and Kenneth Rogoff., 1994. "The Intertemporal Approach to the Current Account," Center for International and Development Economics Research (CIDER) Working Papers C94-044, University of California at Berkeley.
  2. Christopher A. Gohrband & Kristy L. Howell, 2013. "U.S. International Financial Flows and the U.S. Net Investment Position: New Perspectives Arising from New International Standards," NBER Chapters, in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy, pages 231-270 National Bureau of Economic Research, Inc.
  3. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
  4. Meissner, Christopher M & Taylor, Alan M., 2006. "Losing our Marbles in the New Century? The Great Rebalancing in Historical Perspective," CEPR Discussion Papers 5917, C.E.P.R. Discussion Papers.
  5. Magud, Nicolas & Reinhart, Carmen & Rogoff, Kenneth, 2011. "Capital Controls: A Meta-analysis Approach," MPRA Paper 30274, University Library of Munich, Germany.
  6. Cédric Tille & Eric Van Wincoop, 2007. "International capital flows," Staff Reports 280, Federal Reserve Bank of New York.
  7. Coeurdacier, Nicolas & Kollmann, Robert Miguel W. K. & Martin, Philippe J., 2008. "International portfolios, capital accumulation and foreign assets dynamics," Discussion Paper Series 1: Economic Studies 2008,19, Deutsche Bundesbank, Research Centre.
  8. 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.
  9. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  10. Devereux, Michael B. & Sutherland, Alan, 2010. "Country portfolio dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 34(7), pages 1325-1342, July.
  11. Gian M Milesi-Ferretti & Philip R. Lane, 2005. "A Global Perspectiveon External Positions," IMF Working Papers 05/161, International Monetary Fund.
  12. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-Border Returns Differentials," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1495-1530.
  13. Habib, Maurizio Michael, 2010. "Excess returns on net foreign assets: the exorbitant privilege from a global perspective," Working Paper Series 1158, European Central Bank.
  14. Matthew Higgins & Thomas Klitgaard & Cedric Tille, 2005. "The income implications of rising U.S. international liabilities," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Dec).
  15. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  16. Hnatkovska, Viktoria, 2010. "Home bias and high turnover: Dynamic portfolio choice with incomplete markets," Journal of International Economics, Elsevier, vol. 80(1), pages 113-128, January.
  17. Carol C. Bertaut & Ralph W. Tryon, 2007. "Monthly estimates of U.S. cross-border securities positions," International Finance Discussion Papers 910, Board of Governors of the Federal Reserve System (U.S.).
  18. repec:tcd:wpaper:tep16 is not listed on IDEAS
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