Long-Term Capital Movements



data are generally available only for external debt and foreign exchange reserves; IIP availability is
limited, especially along the time series dimension. In addition, the methodologies used to estimate
the various stocks of equation (1) often differ across countries (for example, book or market value for
equity and FDI) making cross-country comparisons more difficult.

In order to overcome the limitations in existing data, we have constructed data on external
assets and liabilities for 66 industrial and developing countries, covering the period 1970-1998. We
discuss in detail the methodology we use for estimating net external positions in Lane and Milesi-
Ferretti (1999). Broadly speaking, we rely on stock data, when available, supplemented by cumulative
flows data, with appropriate valuation adjustments. The latter are particularly important given the
increased role played by portfolio equity and FDI flows during the past decade.

The use of flow data can be better understood by considering the fundamental balance of
payments identity, which states that the current account, net financial flows and changes in foreign
exchange reserves sum to zero, with a term capturing “net errors and omissions” acting as the
balancing item.2 Financial flows can be divided between FDI, portfolio equity and debt flows, plus a
term capturing capital account transfers, which include debt forgiveness operations and other
transactions that do not give rise to a corresponding asset or liability. The evolution of net claims on
the rest of the world is dictated by the flows of new net claims—which equal the current account
balance net of capital transfers
TRk —and by capital gains and losses KG on existing claims

NFAlt = CAit + TR + KGlt                            (2)

Our first measure of net foreign assets, CUMCA, is available for all countries and is obtained by
cumulating current account balances, net of capital transfers, with appropriate adjustments designed
to take into account valuation effects, debt reduction and debt forgiveness and other terms subsumed
in
KG. For example, we adjust the outstanding stock of equity assets and liabilities so as to reflect
variations in the US$ value of stock market indices, and the stocks of inward and outward FDI to

2 We assume that errors and omissions reflect changes in the debt assets held by country residents abroad, in
line with the capital flight literature. See Lane and Milesi-Ferretti (1999) for a discussion of this issue.



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