On Returns Differentials

60 Pages Posted: 17 Apr 2013

See all articles by Stephanie E. Curcuru

Stephanie E. Curcuru

Board of Governors of the Federal Reserve System

Charles P. Thomas

Thomas & Son Analytics

Francis E. Warnock

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

Multiple version iconThere are 2 versions of this paper

Date Written: April 9, 2013


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: Current account, international investment position, direct investment

JEL Classification: F3, G15

Suggested Citation

Curcuru, Stephanie E. and Thomas, Charles P. and Warnock, Francis E., On Returns Differentials (April 9, 2013). FRB International Finance Discussion Paper No. 1077. Available at SSRN: https://ssrn.com/abstract=2251875 or http://dx.doi.org/10.2139/ssrn.2251875

Stephanie E. Curcuru (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
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Charles P. Thomas

Thomas & Son Analytics ( email )

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Chevy Chase, MD 20815
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Francis E. Warnock

University of Virginia - Darden Business School ( email )

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United States
434-924-6076 (Phone)

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

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138-5398

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