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Long-Term Capital Movements

  • Philip Lane
  • Gian Maria Milesi-Ferretti

International financial integration allows countries to become net creditors or net debtors with respect to the rest of the world. In this paper, we show that a small set of fundamentals-shifts in relative output levels, the stock of public debt and demographic factors-can do much to explain the evolution of net foreign asset positions. In addition, we highlight that "external wealth" plays a critical role in determining the behavior of the trade balance, both through shifts in the desired net foreign asset position and the investment returns generated on the outstanding stock of net foreign assets. Finally, we provide some evidence that a portfolio balance effect exists: real interest rate differentials are inversely related to net foreign asset positions.

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Paper provided by Trinity College Dublin, Department of Economics in its series CEG Working Papers with number 20018.

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Date of creation: 2001
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Handle: RePEc:tcd:tcdceg:20018
Contact details of provider: Postal: Trinity College, Dublin 2
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Web page: http://www.tcd.ie/Economics/

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  2. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc.
  3. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," CEG Working Papers 20012, Trinity College Dublin, Department of Economics.
  4. Sebastian Edwards, 2001. "Does the Current Account Matter?," NBER Working Papers 8275, National Bureau of Economic Research, Inc.
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  9. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  10. Taylor, Alan M & Williamson, Jeffrey G, 1994. "Capital Flows to the New World as an Intergenerational Transfer," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 348-71, April.
  11. Bayoumi, Tamim & Gagnon, Joseph, 1996. "Taxation and inflation: A new explanation for capital flows," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 303-330, October.
  12. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
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  14. Halevi, Nadav, 1971. "An empirical test of the balance of payments stages hypothesis," Journal of International Economics, Elsevier, vol. 1(1), pages 103-117, February.
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  17. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
  18. Masson, Paul R. & Kremers, Jeroen & Horne, Jocelyn, 1994. "Net foreign assets and international adjustment: The United States, Japan and Germany," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 27-40, February.
  19. Higgins, Matthew, 1998. "Demography, National Savings, and International Capital Flows," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 343-69, May.
  20. Ray C. Fair & Kathryn M. Dominguez, 1987. "Effects of the Changing U.S. Age Distribution on Macroeconomic Equations," Cowles Foundation Discussion Papers 839, Cowles Foundation for Research in Economics, Yale University.
  21. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  22. Hamid Faruqee & Douglas Laxton, 2000. "Life-Cycles, Dynasties, Savings; Implications for Closed and Small, Open Economies," IMF Working Papers 00/126, International Monetary Fund.
  23. Alan M. Taylor, 1994. "Domestic Saving and International Capital Flows Reconsidered," NBER Working Papers 4892, National Bureau of Economic Research, Inc.
  24. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
  25. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  26. Herbertsson, Tryggvi Thor & Zoega, Gylfi, 1999. "Trade surpluses and life-cycle saving behaviour," Economics Letters, Elsevier, vol. 65(2), pages 227-237, November.
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