Long-Term Capital Movements
Philip R. Lane
Trinity College (Dublin) - Department of Economics; Centre for Economic Policy Research (CEPR)
Gian Maria Milesi-Ferretti
International Monetary Fund (IMF); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. 2873
International financial integration allows countries to become net creditors or net debtors with respect to the rest of the world. In this Paper, we show that a small set of fundamentals shifts in relative output levels, the stock of public debt and demographic factors can do much to explain the evolution of net foreign asset positions. In addition, we highlight that 'external wealth' plays a critical role in determining the behavior of the trade balance, both through shifts in the desired net foreign asset position and the investment returns generated on the outstanding stock of net foreign assets. Finally, we provide some evidence that a portfolio balance effect exists: real interest rate differentials are inversely related to net foreign asset positions.
Number of Pages in PDF File: 55
Keywords: Net foreign assets, capital flows, trade balance, portfolio balance
JEL Classification: E20, F20, F40, O10
Date posted: July 26, 2001
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