International Financial Integration*

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Let investment income receipts in US dollars related to asset-type X in year t be

IC_t^X (where IC stands for income credit) and investment income payments be ID_t^X (where

X   IC^X

ID stands for income debits). We define the US dollar yield on assets as ycX = —— and

^XAt-1

X  ID^X

the yield on liabilities as yd^χ = —^t-, where XA ( XL ) are the country s stocks of external
XLt-1

X-type assets and liabilities, respectively.

The year t capital gain on asset X is given by the difference between the change in the

stock of X between t and t-1 and the underlying flow x during year t, divided by the initial

XAXA  xa       XLXL  xl

stock ofX: kc^χ = A——X_----^t- and kd^χ = —^t-----^t-1----^t-. Finally, the nominal rate

t         XAt-1              t         XL-1              ^У

of return on assets is ic_t^X=(1+yc_t^x)(1+kc_t^X) -1 , and on liabilities

id_t^X=(1+yd_t^x)(1+kd_t^X) -1 . Real yields and real rates of return are obtained by deflating

nominal US dollar returns by the US rate of inflation. Nominal and real rates of return in
domestic currency are obtained using the same methodology, but with all variables
measured in domestic currency.²⁴

The data difficulties in undertaking this type of study are substantial. These relate in
particular to measurement error problems for balance-of-payments-derived yields and
rates of return, and to lack of information concerning the currency composition of external
assets and liabilities. We discuss these difficulties in turn.

Measurement error problems in deriving yields and rates of return from balance of
payments data can arise from several sources:

²⁴ Stocks are converted into domestic currency using the end-of-period exchange rate and
flows using the period-average exchange rate, following the balance of payments
convention.

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