17
improvement in net foreign assets. Instead, the level of US net external liabilities has increased
substantially during this period.26 A similar diverging pattern between actual and fitted values occurs
in the late nineties for Japan, for exactly the symmetric reason—faltering GDP growth and rapidly
increasing public debt would lead us to expect, ceteris paribus, a worsening in the net foreign asset
position, while Japan’s improved throughout the period.27
For developing countries, the overall fit shown in Figure 8 is very good, with very few
exceptions. One is Venezuela, which has severe measurement problems for its net foreign asset
position because of the size of unrecorded assets held abroad. The divergence for Malaysia’s actual
and fitted values in the 1990s is due to the same factors at work in the United States: our model
predicts that fast growth and a declining public debt should be associated with falling external
liabilities.
In summary, the data suggest that foreign asset positions in industrial countries exhibit a
strong co-movement with relative output per capita, while their quantitative link with public debt is
relatively weak. Conversely, public debt is very strongly correlated with the dynamics of net external
liabilities in developing countries, while the relation with income per capita along the time series
dimension is weak or negative. In addition, in both samples, the demographic variables generally play
an important role in determining net foreign asset positions. Our simple econometric specification
captures long-run trends in net foreign assets very well for developing countries and small open
industrial economies, but is less successful in explaining the behavior of net foreign assets in larger
countries.
3.3.3 Cross-sectional evidence The panel data analysis presented in the previous sub-section has
focused on the evolution of net foreign assets within countries. In this sub-section, we investigate the
cross-sectional relation between net foreign assets and their determinants, focusing on the 1990s.
26 See Obstfeld and Rogoff (2000) on the sustainability of the US external position.
27 In part, these patterns can be linked to the increased degree of equity diversification across countries: for
example, the strong performance of US equity markets during the 1990s and the weak performance of Japanese
markets implied capital gains for foreign holders of US equities and losses for foreign holders of Japanese
equities.