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liabilities and FDI liabilities have different effects?) and to investigate the interaction between net
foreign asset positions and other risk factors in determining real interest rate differentials.
6. Conclusions
Our primary goal in this paper has been to demonstrate the fruitfulness of studying the behavior of a
key state variable in international macroeconomics: namely, the net foreign asset position. We have
shown that persistent fundamentals — output per capita, public debt and demographic variables —
have a major influence on the direction of international asset trade. Moreover, we have examined the
role played by the desired and actual net foreign asset position in determining the trade balance, the
former since trade balances are typically required to accomplish changes in the target net foreign asset
position, the latter due to the role played by investment returns on outstanding foreign assets and
liabilities. Finally, we have presented evidence that the net foreign asset position is also important in
determining international asset prices, exerting a negative influence on real interest rate differentials.
Given the space limitations, there are many interesting questions concerning foreign asset and
liability positions that we cannot address in this paper. In other work, we have shown that net foreign
asset positions exert an important influence on the long-run behavior of real exchange rates (Lane and
Milesi-Ferretti 2000a) and made an initial exploration of the determinants of the structure of the
“international balance sheet” between debt, portfolio equity and foreign direct investment (Lane and
Milesi-Ferretti 2000b). Among the important issues that we must defer to future research is the role
played by the level and composition of the external balance sheet in determining the probability of a
financial crisis, and an exploration of the factors driving differences in cross-countries rates of return
on external assets and liabilities.