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The Stability of Large External Imbalances: The Role of Returns Differentials
Stephanie E. Curcuru Federal Reserve Board Tomas Dvorak Union College Francis E. Warnock University of Virginia - Darden Business School; National Bureau of Economic Research (NBER) April 2007 FRB International Finance Discussion Paper No. 894 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: current account imbalances, international investment JEL Classifications: F3 Working Paper SeriesDate posted: April 20, 2007 ; Last revised: June 10, 2007Suggested CitationContact Information
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