NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Long-Term Capital Movements

Philip R. Lane, Gian Milesi-Ferretti

NBER Working Paper No. 8366
Issued in July 2001
NBER Program(s):   IFM

International financial integration allows countries to become net creditors or net debtors with respect to the rest of the world. In this paper, we show that a small set of fundamentals--shifts in relative output levels, the stock of public debt and demographic factors--can do much to explain the evolution of net foreign asset positions. In addition, we highlight that external wealth' plays a critical role in determining the behavior of the trade balance, both through shifts in the desired net foreign asset position and the investment returns generated on the outstanding stock of net foreign assets. Finally, we provide some evidence that a portfolio balance effect exists: real interest rate differentials are inversely related to net foreign asset positions.

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Published: Long-Term Capital Movements, Philip R. Lane, Gian Maria Milesi-Ferretti, in NBER Macroeconomics Annual 2001, Volume 16 (2002), MIT Press (p. 73 - 136)

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