Working Paper: NBER ID: w18866
Authors: Stephanie E. Curcuru; Charles P. Thomas; Francis E. Warnock
Abstract: Estimates of U.S. returns differentials have ranged from exorbitant to quite small, in part because of their volatility coupled with the relatively short time series available. We shed light on underlying drivers of returns differentials by presenting a number of decompositions: a by-asset-class decomposition into yields and capital gains, the Gourinchas and Rey (2007a) composition and return effects, and further decompositions of capital gains that focus on exchange rate effects. While each decomposition informs thinking about returns differentials, one constant is evident throughout: to date the existing differential favoring the U.S. has owed primarily to one factor, a differential in direct investment yields. We discuss how our analysis informs the income puzzle (of positive net income flows to the U.S. even as its net international investment position is negative and substantial) and the position puzzle (of a sizeable gap between the reported U.S. net international position and cumulated current account deficits), provide an initial assessment of the literature on the dynamics of returns differentials, and present a framework to guide a forward-looking view of how returns differentials might evolve in the future.
Keywords: returns differentials; direct investment yields; income puzzle; position puzzle
JEL Codes: F3; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Direct Investment Yields (F21) | Returns Differential (C22) |
| Returns Differential (C22) | US Net Income Balance (H69) |
| Exchange Rate Movements (F31) | Returns Differential (C22) |