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International Capital Flows and Debt Dynamics

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Abstract

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.

Suggested Citation

  • Martin Evans, 2012. "International Capital Flows and Debt Dynamics," Working Papers gueconwpa~12-12-04, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~12-12-04
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    Cited by:

    1. Gourinchas, Pierre-Olivier & Rey, Hélène, 2014. "External Adjustment, Global Imbalances, Valuation Effects," Handbook of International Economics, Elsevier.
    2. Alberto Fuertes, 2017. "Exchange rate regime and external adjustment: an empirical investigation for the U.S," Working Papers 1717, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

    Capital Flows; External Imbalances; International Debt; International Solvency; Exorbitant Privilege;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • 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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