Long-Run Determinants of the Net International Investment Position

In a financially integrated world, some countries become international net creditors while others become international net debtors. This paper examines the long-run determinants of the net international investment position (NIIP). Using a cross-sectionally augmented error correction model estimated with the dynamic common correlated effects estimator on data for 38 countries from 1990 to 2023, we test several theoretical hypotheses – including the stages of development hypothesis, the life-cycle hypothesis, and Ricardian equivalence. The results show that an increase in relative GDP per capita and relative central government (CG) debt/GDP reduces the NIIP/GDP in the long run, while a rise in relative old-age dependency increases it. For selected countries, we decompose changes in the long-run NIIP/GDP since 1990. In the United States, a decline in the long-run NIIP/GDP reflects rising relative GDP per capita, falling relative old-age dependency, and, from 2018, growing CG debt/GDP. In Japan, relative population aging and a decline in relative GDP per capita support an increase in the long-run NIIP/GDP, while the expansion of relative CG debt/GDP weighs it down.