A Portfolio Approach to Global Imbalances
48 Pages Posted: 19 Jan 2021 Last revised: 13 Jul 2021
Date Written: March 7, 2020
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
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