A Portfolio Approach to Global Imbalances

48 Pages Posted: 19 Jan 2021 Last revised: 13 Jul 2021

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance

Robert Richmond

New York University (NYU) - Department of Finance

Tony Zhang

Board of Governors of the Federal Reserve System

Date Written: March 7, 2020

Abstract

We develop a portfolio-based framework to understand the deterioration of the U.S. net foreign asset (NFA) position and the returns earned on U.S. NFA (exorbitant privilege). We show global savings gluts and monetary policies widened the U.S. NFA position, while investor demand shifts offset this widening. Moreover, U.S. privilege declined after 2010, in accordance with declining debt issuance and increasing foreign demand for U.S. equity. Our framework highlights a quantity dimension of the U.S. privilege: demand for U.S. debt is highly inelastic, allowing the U.S. to issue substantially more debt for a given yield increase.

Keywords: Capital flows, global imbalances, savings glut, monetary policy

Suggested Citation

Jiang, Zhengyang and Richmond, Robert and Zhang, Tony, A Portfolio Approach to Global Imbalances (March 7, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3744340 or http://dx.doi.org/10.2139/ssrn.3744340

Zhengyang Jiang (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://sites.google.com/site/jayzedwye/

Robert Richmond

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Tony Zhang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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