TY  - JOUR
AU  - Curcuru,Stephanie E.
AU  - Dvorak,Tomas
AU  - Warnock,Francis E.
TI  - The Stability of Large External Imbalances: The Role of Returns Differentials
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13074
PY  - 2007
Y2  - May 2007
UR  - http://www.nber.org/papers/w13074
L1  - http://www.nber.org/papers/w13074.pdf
N1  - Author contact info:
Stephanie E. Curcuru
Board of Governors
of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington DC 20551
E-Mail: stephanie.e.curcuru@frb.gov

Tomas Dvorak
Union College
Department of Economics
Social Sciences Bldg 215
Schenectady, NY 12308
Tel: 518-388-8016
E-Mail: dvorakt@union.edu

Francis E. Warnock
Darden Business School
University of Virginia
Charlottesville, VA 22906-6550
Tel: 434/924-6076
Fax: 434/243-8945
E-Mail: warnockf@darden.virginia.edu
AB  - Were the U.S. to persistently earn substantially more on its foreign investments ("U.S. claims") than foreigners earn on their U.S. investments ("U.S. liabilities"), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, utilizing data on the actual foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors, we find that the returns differential of U.S. claims over U.S. liabilities is essentially zero. Ending our sample in 2005, the differential is positive, whereas through 2004 it is negative; in both cases the differential is statistically indecipherable from zero. Moreover, were it not for the poor timing of investors from developed countries, who tend to shift their U.S. portfolios toward (or away from) equities prior to the subsequent underperformance (or strong performance) of equities, the returns differential would be even lower. Thus, in the context of equity and bond portfolios we find no evidence that the U.S. can count on earning more on its claims than it pays on its liabilities.
ER  -