Long-Term Capital Movements

Why then has little attention been devoted to studying such longer-run issues? Paucity of data
on foreign asset and liability stocks has been a traditional barrier to research on net foreign asset
positions. Only a few countries have published reliable estimates of accumulated stocks, whereas
current account data have been much more widely available. In Lane and Milesi-Ferretti (1999), we
have employed a uniform methodology to generate estimates of foreign asset and liability positions
for a large number of industrial and developing countries over the past three decades. This data set
enables us to analyze the behavior of net foreign asset positions in a more comprehensive manner
than in the efforts of previous researchers.

We address three questions about net foreign asset positions. First, we try to explain their
behavior, across countries and over time, investigating why some countries are net creditors and
others net debtors, and why some creditors turn into debtors, such as the United States, and vice-
versa, like Singapore. Identifying the long-term macroeconomic forces underlying the endogenous
determination of net foreign asset positions provides insight into the role played by international
financial integration in allowing countries to de-link national production and consumption.

Second, we identify two mechanisms that link trade balances to net foreign asset positions.
One key channel is that changes in the target long-run net foreign asset position are an important
force driving the current account. The other is that, for a given desired net foreign asset position, a
country that enjoys high returns on its foreign assets and pays out low returns on its foreign liabilities
can afford to run a smaller trade surplus (or larger trade deficit). In this way, we highlight the role of a
state variable (the net foreign asset position) in determining the dynamics of the trade balance.

Third, we explore the relation between net foreign asset positions and the real interest rate
differential. This is an old question in the portfolio balance literature: do debtor countries pay a risk
premium? The traditional literature attempted to link currency return differentials to outstanding
relative stocks of national monies but much less research has been directed at linking differences in
real interest rates across countries to long-run net foreign asset positions (Frankel and Rose, 1995).

The structure of the rest of the paper is as follows. In section 2, we briefly discuss the broad

<<   1   2   3   4   5   6   >>

More intriguing information