Long-Term Capital Movements

16

in government debt is associated with a [13.4, 17.2] percentage point decline in net foreign assets.
This high “pass-through” from net government liabilities to net external liabilities is also consistent
with pervasive credit constraints in developing countries, since credit market imperfections are
understood to be a primary source of deviations from Ricardian Equivalence (Bernheim 1987).²²

With respect to the impact of demographic structure on the net foreign asset positions of
developing countries, the evidence in Table 3 shows a pattern similar to that for industrial countries:
an increase in the population share of younger age groups is associated with a decline in the net
foreign asset position. A comparison of the α coefficients between the industrial and developing
countries also shows a greater sensitivity of the net foreign asset position to age structure in the latter
group. However, the significance of these demographic effects is weakened when Singapore is
excluded from the sample.²³ Finally, results forthe balanced sample in column (7) are quite similarto
those for the full sample, although the magnitude of the public debt effect falls somewhat to -0.50.²⁴

We turn now to examining how well our panel specification, which imposes equality of all
slope coefficients within our two country groups, can match the dynamics of net foreign assets at the
individual country level. For this purpose, Figures 7 and 8 plot actual and fitted long-run values of
net foreign assets for selected industrial and developing countries.²⁵

For the richer countries, the graphs suggest that our specification matches the time-series
behavior of net foreign assets quite well in small open economies, but does not do as well for
Germany, the United Kingdom and the United States. For the latter country, public debt has been
declining and growth has been strong in the late 1990s, and both factors would lead us to expect an

²² In most of the developing countries in our sample, public debt was primarily contracted internationally, given
the shallowness of domestic financial markets.

²³ Singapore has undergone a dramatic demographic transition, with a rapid ageing of the population. Of course,
this may precisely represent very good evidence regarding the effect of demography on net foreign assets, since
Singapore has also been rapidly accumulating external assets in recent years.

²⁴ The balanced sample for developing countries excludes Algeria, Argentina, Bolivia, Botswana, Brazil, Chile,
Cote d’Ivoire, DominicanRepublic, Paraguay, Peru, Trinidad & Tobago, Turkey and Zimbabwe.

²⁵ Graphs for all other countries are available from the authors. The fitted values are generated from fixed-
effects panel OLS regressions: coefficient estimates are very similar to those obtained from the DOLS
specification.

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