Working Paper: NBER ID: w30253
Authors: Zhengyang Jiang; Robert J. Richmond; Tony Zhang
Abstract: We use a portfolio-based framework to understand what drives the decline of the U.S. net foreign asset (NFA) position and the reversal in returns earned on the US NFA (exorbitant privilege). We show that global savings gluts and monetary policies widened the U.S. NFA position, while investor demand shifts partially offset this widening. Moreover, U.S. privilege declined after 2010, in accordance with increasing foreign demand for U.S. equity. We also highlight a quantity dimension of the U.S. privilege: the U.S. can issue substantially more debt than other countries for a given yield increase.
Keywords: Global Imbalances; Net Foreign Assets; Exorbitant Privilege
JEL Codes: E44; F32; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global private savings (D14) | US net foreign asset (NFA) position (F21) |
| central bank monetary policies (E58) | US net foreign asset (NFA) position (F21) |
| asset issuances (G32) | US net foreign asset (NFA) position (F21) |
| global savings gluts (E21) | widening of the US net foreign asset (NFA) position (F30) |
| shifts in investor demand (G19) | offsetting the widening of the US net foreign asset (NFA) position (F32) |
| increased foreign demand for US equities (G15) | narrowing of the US net foreign asset (NFA) position (F32) |
| US's exorbitant privilege (F31) | positive return differential on external assets compared to liabilities (F21) |
| US can issue more debt than other countries (H63) | yield increase (E25) |