The Stabilizing Role of Net Foreign Asset Returns

April 6, 2018

Preview Citation

Format: Chicago

Gustavo Adler, and Daniel Garcia-Macia. The Stabilizing Role of Net Foreign Asset Returns, (USA: International Monetary Fund, 2018) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

With the rapid growth of countries' foreign asset and liability positions over the last two decades, financial returns on those positions ('NFA returns') have become material drivers of current accounts and net stock positions. This paper documents the relative importance of NFA return versus trade channels in driving NFA dynamics, for a sample of 52 economies over 1990-2015. While persistent trade imbalances have been a strong force leading to diverging NFA positions, NFA returns have played an important stabilizing role, mitigating NFA divergence. The stabilizing role of NFA returns primarily reflects the response of asset prices, rather than yield differentials or exchange rates. There is also evidence of heterogeneity in the speed of NFA adjustment, with emerging market economies adjusting more rapidly than advanced economies, and reserve-currency countries adjusting more slowly than others. The paper also documents the role of NFA returns as insurance against domestic and global income shocks, with a focus on reserve-currency countries.

Subject: Asset prices, Exchange rates, Financial institutions, Foreign exchange, Income shocks, Insurance, International trade, National accounts, Prices, Trade balance

Keywords: Asset prices, Exchange rates, Global, Income shocks, Insurance, International investment position, Net foreign assets, NFA dynamics, NFA position, NFA return, Return differential, Trade balance, Valuation change, Valuation changes, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/079
Stock No:

WPIEA2018079
ISBN:

9781484349922
ISSN:

1018-5941

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