On the Dynamics of the Investment Income Balance

41 Pages Posted: 11 Jul 2016  

Thomas Knetsch

Deutsche Bundesbank - Economics Department

Arne J. Nagengast

Deutsche Bundesbank - Economics Department

Date Written: 2016

Abstract

While the positive return differential of the United States has attracted a lot of attention in the literature, the factors underlying the dynamics of the investment income balance have so far not been systematically investigated. Here, we propose a novel decomposition framework that accounts for the changes in net investment income. This allows us to disentangle contributions of changes in yield level and yield spread from those of changes in stocks as well as composition and portfolio effects. The analysis contributes conceptually to the question of how investment income might facilitate international risk sharing. We apply our decomposition framework to a rich German dataset spanning 11 different investment classes and provide a forensic account of the increase in the German investment income balance between 1999 and 2014. Focusing exclusively on the aggregate development of external assets and liabilities falls short of explaining the growth in German net investment income and around 40% of the increase is explained by changes in yields. Furthermore, our results highlight the importance of considering the composition of external assets and liabilities as well as portfolio changes in order to understand the dynamics of the investment income balance.

Keywords: Investment income balance, Return differential, Exorbitant privilege, International risk sharing

JEL Classification: E50, F36, F45, G15

Suggested Citation

Knetsch, Thomas and Nagengast, Arne J., On the Dynamics of the Investment Income Balance (2016). Bundesbank Discussion Paper No. 21/2016. Available at SSRN: https://ssrn.com/abstract=2807292

Thomas Knetsch (Contact Author)

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Arne J. Nagengast

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Paper statistics

Downloads
16
Abstract Views
230