Working Paper: CEPR ID: DP2873
Authors: Philip R. Lane; Gian Maria Milesi-Ferretti
Abstract: 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.
Keywords: capital flows; net foreign assets; portfolio balance; trade balance
JEL Codes: E20; F20; F40; O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output per capita (E23) | net foreign assets (F30) |
| public debt (H63) | net foreign assets (F30) |
| demographic factors (J11) | net foreign assets (F30) |
| real interest rates (E43) | net foreign assets (F30) |
| net foreign assets (F30) | trade balance (F14) |