Long-Term Capital Movements

properties of our data set of foreign assets and liabilities. The determination of long-run net foreign
asset positions is investigated in section 3. Section 4 models the short-run dynamics of the net foreign
asset position and the behavior of the trade balance. We turn in section 5 to the relation between the
net foreign asset position and the real interest rate differential. Conclusions and directions for future
research are offered in section 6.

2. International Balance Sheets: Stylized Facts

2.1 METHODOLOGY

A country’s net external position is the sum of net claims of domestic residents on non-residents. In
line with the way in which transactions are recorded in balance of payments statistics, we classify
external assets and liabilities into three main categories: foreign direct investment (FDI), portfolio
equity (EQ), and debt instruments (DEBT). Foreign exchange reserves (FX) belong in this last
category, although we keep them separate in the overall accounting. Hence we define net foreign
assets (NFA) as follows

NFA_it = FDIA_lt + EQA_it + DEBTA_tt + FX_it - FDIL_tt - EQL_tt - DEBTL_tt       (1)

where the letter A indicates assets and the letter L liabilities. The FDI category reflects a “lasting
interest” of an entity resident in one economy in an enterprise resident in another economy (IMF,
1993). This includes greenfield investment as well as equity participation giving a controlling stake
(typically set at above 10%), while remaining equity purchases are classified under portfolio equity
investment.¹ The debt category includes trade credits, bank loans and portfolio bond instruments.

For most industrial countries, estimates of stocks of external assets and liabilities are
published by national authorities and collected by the IMF and the OECD, but coverage starts for
most countries only in the early eighties. The corresponding measure of net foreign assets is called
the International Investment Position (IIP). For developing countries, however, comprehensive stock

¹ This implies that in certain cases the distinction between these two categories can de facto be blurred, but the
issue cannot be clarified further in the absence of detailed disaggregated data.

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