Working Paper: CEPR ID: DP5220
Authors: Pierre-Olivier Gourinchas; Hélène Rey
Abstract: Does the centre country of the International Monetary System enjoy an 'exorbitant privilege' that significantly weakens its external constraint as has been asserted in some European quarters? Using a newly constructed dataset, we perform a detailed analysis of the historical evolution of US external assets and liabilities at market value since 1952. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. Interestingly, this excess return increased after the collapse of the Bretton Woods fixed exchange rate system. It is mainly due to a return discount: within each class of assets, the total return (yields and capital gains) that the US has to pay to foreigners is smaller than the total return the US gets on its foreign assets. We also find evidence of a composition effect: the US tends to borrow short and lend long. As financial globalization accelerated its pace, the US transformed itself from a World Banker into a World Venture Capitalist, investing greater amounts in high yield assets such as equity and FDI. We use these findings to cast some light on the sustainability of the current global imbalances.
Keywords: dollar; exchange rate; financial adjustment channel; gross positions; net foreign assets; sustainability; trade adjustment channel
JEL Codes: F3; N1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. external adjustment (F32) | positive income balance (F32) |
| gross liabilities exceeding assets (G33) | positive income balance (F32) |
| U.S. assets yield higher returns (G15) | excess return (G11) |
| structure of U.S. liabilities dominated by low-yielding securities (G12) | excess return (G11) |
| shift in investment strategies towards higher-yield assets (G11) | U.S. external adjustment (F32) |
| depreciation of the dollar (F31) | return on U.S. foreign assets (F21) |
| depreciation of the dollar (F31) | burden of liabilities (G32) |
| U.S. external position (F30) | net payments on liabilities (G32) |