Long-Term Capital Movements

12

output per capita and improvement in the net foreign asset position among the industrial nations. A
significant positive relation between output per capita and the net foreign asset position is also evident
in the developing country sample in Panel B of Figure 6. However, the slope is flatter and the overall
fit is much weaker. We will return to the difference in slopes between the industrial and developing
samples when interpreting the results of the regression analysis below.

Figure 5 plots the change in the net foreign asset position against the change in the public
debt to GDP ratio. For both industrial and developing countries, we observe an inverse bivariate
relation: growth in public debt tends to be associated with a decline in the net foreign asset position.

We turn to the impact of demographic structure in Figure 6. This figure charts the correlation
between the change in the net foreign asset position and the change in the population shares in each
age cohort (0-14, 15-19, ... , 60-64, 65+). Forthe industrial countries, we see that an increase in the
youth dependency ratio is associated with a decline in the net foreign asset position, as is an increase
in the 30-49 age groups (albeit these correlations are weaker). There is a “twin peaks” effect here:
increases in both the 15-29 and 50-64 age groups are associated with an improvement in net foreign
assets. For the developing countries, the impact of demographic structure is more uniform: an
increase in the 15-29 population share is associated with a decline in the net foreign asset position,
whereas the 30-49 population share exerts a positive effect.

Although these scatter diagrams provide some suggestive evidence, the interpretation of
bivariate relations of course should not be pushed too far. For instance, there is a strong correlation in
the data between demographic structure and output per capita, both along the time series and the
cross-sectional dimension, which could explain the co-movements of one of these variables with net
foreign assets. To uncover whether all of these variables play a simultaneous role in the dynamics of
net foreign assets, we next turn to panel regressions for formal multivariate regression analysis.

3.3.2 Panel Fixed-Effects Regression Analysis Since we are interested in the role played by shifts in
our fundamentals in explaining the dynamic evolution of net foreign asset positions, we focus on a
fixed-effects panel specification in this subsection (we consider the cross-section evidence in the next

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