Working Paper

Cross-border returns differentials

Abstract: 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, we find that the returns differential of U.S. claims over U.S. liabilities is far smaller than previously reported and, importantly, is near zero for portfolio equity and debt securities. ; > For portfolio securities, we confirm our finding using a separate dataset on the actual foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors; 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. Finally, we reconcile our finding of a near zero returns differential with observed patterns of cumulated current account deficits, the net international investment position, and the net income balance.

Keywords: International; finance;

JEL Classification: F3;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2007

Number: 04

Pages: 37 pages

Note: Published as: Curcuru, Stephanie E., Tomas Dvorak and Francis E. Warnock (2008), "Cross-Border Returns Differentials," Quarterly Journal of Economics 123 (4): 1495-1530.