Working Paper: NBER ID: w13074
Authors: Stephanie E. Curcuru; Tomas Dvorak; Francis E. Warnock
Abstract: Were the U.S. to persistently earn substantially more on its foreign investments ("U.S. claims") than foreigners earn on their U.S. investments ("U.S. liabilities"), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, utilizing data on the actual foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors, we find that the returns differential of U.S. claims over U.S. liabilities is essentially zero. Ending our sample in 2005, the differential is positive, whereas through 2004 it is negative; in both cases the differential is statistically indecipherable from zero. Moreover, were it not for the poor timing of investors from developed countries, who tend to shift their U.S. portfolios toward (or away from) equities prior to the subsequent underperformance (or strong performance) of equities, the returns differential would be even lower. Thus, in the context of equity and bond portfolios we find no evidence that the U.S. can count on earning more on its claims than it pays on its liabilities.
Keywords: external imbalances; returns differentials; US claims; US liabilities
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| returns differential is statistically indistinguishable from zero (C12) | lack of statistically significant positive returns differential (G40) |
| composition of US claims (weighted toward equities) (G12) | returns differential (C29) |
| underperformance of US equities relative to foreign equities (P17) | neutralization of composition effect (C21) |
| poor timing of foreign investors' investment decisions (F21) | lower returns on US portfolios (G15) |
| negative timing effect (G41) | observed returns differential (C29) |
| foreign investors tend to invest heavily in US assets just before underperformance (G15) | negative timing effect (G41) |