The Stability of Large External Imbalances: The Role of Returns Differentials

50 Pages Posted: 27 Jun 2007 Last revised: 23 Sep 2022

See all articles by Stephanie E. Curcuru

Stephanie E. Curcuru

Board of Governors of the Federal Reserve System

Tomas Dvorak

Union College

Francis E. Warnock

University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)

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Date Written: May 2007

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.

Suggested Citation

Curcuru, Stephanie E. and Dvorak, Tomas and Warnock, Francis E., The Stability of Large External Imbalances: The Role of Returns Differentials (May 2007). NBER Working Paper No. w13074, Available at SSRN: https://ssrn.com/abstract=986924

Stephanie E. Curcuru (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Tomas Dvorak

Union College ( email )

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Francis E. Warnock

University of Virginia - Darden Business School ( email )

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HOME PAGE: http://faculty.darden.virginia.edu/warnockf/index.htm

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