The Stability of Large External Imbalances: The Role of Returns Differentials

55 Pages Posted: 20 Apr 2007  

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)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2007

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 Classification: F3

Suggested Citation

Curcuru, Stephanie E. and Dvorak, Tomas and Warnock, Francis E., The Stability of Large External Imbalances: The Role of Returns Differentials (April 2007). FRB International Finance Discussion Paper No. 894. Available at SSRN: https://ssrn.com/abstract=981287 or http://dx.doi.org/10.2139/ssrn.981287

Stephanie E. Curcuru (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Tomas Dvorak

Union College ( email )

Schenectady, NY 12308-3107
United States
518 388 8016 (Phone)

Francis E. Warnock

University of Virginia - Darden Business School ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-6076 (Phone)

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138-5398

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