Working Paper: NBER ID: w11563
Authors: Pierre-Olivier Gourinchas; Hélène Rey
Abstract: Does the center 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 BrettonWoods 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: US external adjustment; exorbitant privilege; international monetary system; net foreign assets; global imbalances
JEL Codes: F3; N1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Depreciation of the dollar (F31) | Capital gains on foreign asset holdings (F21) |
| Capital gains on foreign asset holdings (F21) | Return on the net foreign portfolio (F21) |
| U.S. net foreign asset position (F30) | Returns on U.S. gross assets (F21) |
| U.S. net foreign asset position (F30) | Positive income balance (F32) |
| Positive income balance (F32) | Exorbitant privilege of the U.S. (F31) |
| Changes in asset composition (G32) | Valuation effects (D46) |
| Exchange rate changes (F31) | Net exports (F10) |
| Exchange rate changes (F31) | Asset returns (G19) |