Long-Term Capital Movements

provided by Research Papers in Economics

Long-Term Capital Movements*

Philip R. Lane

Trinity College Dublin and CEPR

Gian Maria Milesi-Ferretti
International Monetary Fund and CEPR

This draft: June 15, 2001

Abstract

International financial integration allows countries to become net creditors or net debtors with respect
to the rest of the world. In this paper, we show that a small set of fundamentals--shifts in relative
output levels, the stock of public debt and demographic factors--can do much to explain the evolution
of net foreign asset positions. In addition, we highlight that “external wealth” plays a critical role in
determining the behavior of the trade balance, both through shifts in the desired net foreign asset
position and the investment returns generated on the outstanding stock of net foreign assets. Finally,
we provide some evidence that a portfolio balance effect exists: real interest rate differentials are
inversely related to net foreign asset positions.

Forthcoming in the NBER Macroeconomics Annual 2001. We thank Ken Rogoff, Ben Bernanke and
our discussants Kristen Forbes and Jeffrey Frankel for helpful suggestions; Sam Ouliaris for extensive
econometric advice; Jerry Coakley, Hamid Faruqee, Eswar Prasad, Morten Ravn and participants in
the Trinity Research Lunch, the Dublin Economics Workshop, the Joint IMF∕World Bank seminar,
and seminars at the International Finance Division of the Federal Reserve Board, Birkbeck College
and Queen’s University Belfast for comments. For help with constructing the public debt data, we are
very grateful to Ilan Goldfajn, Alessandro Missale, Gustavo Morales, Rafael Rodriguez-Balza,
Sebastian Sosa, Michel Strawczynski, Mauricio Villafuerte and several colleagues at the IMF.
Mathias Hoffman, Grace Juhn and Charles Larkin provided excellent research assistance. Lane's work
on this paper was partly conducted during a visit to the Research Department of the IMF and is part of
a research network on ‘The Analysis of International Capital Markets: Understanding Europe’s Role
in the Global Economy’, funded by the European Commission under the Research Training Network
Programme (Contract No. HPRN-CT-1999-00067). Lane also gratefully acknowledges the support
of a TCD Berkeley Fellowship.

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