Cross-Border Returns Differentials
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, using a monthly dataset on the 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 for portfolio securities is near zero, far smaller than previously reported. Examining all U.S. claims and liabilities (portfolio securities as well as direct investment and banking), we find that previous estimates of large differentials are biased upward. The bias owes to computing implied returns from an internally inconsistent dataset of revised data; original data produce a much smaller differential. We also attempt to 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. Overall, we find no evidence that the U.S. can count on earning substantially more on its claims than it pays on its liabilities.
The authors are indebted to Charles Thomas, Robert Barro, and numerous anonymous referees for guidance. We also thank for helpful comments Carol Bertaut, Ricardo Caballero, John Driffill, Charles Engel, Kristin Forbes, Gian Maria Milesi-Ferretti, Pierre-Olivier Gourinchas, Philip Lane, Trevor Reeve, Helene Rey, Cedric Tille, Ralph Tryon, Eric van Wincoop, Jon Wongswan, and seminar participants at ECB, Federal Reserve Bank of Dallas, the NBER IFM Fall Meeting, the CEPR/ESI 11th Annual Conference on Global Imbalances, Competitiveness and Emerging Markets, and the 9th Conference of the ECB-CFS Research Network. We thank James Albertus and DeVer Warner for excellent research assistance. Warnock thanks the Federal Reserve Bank of Dallas and the Darden School Foundation for generous support. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of Dallas, the Board of Governors of the Federal Reserve System, or of any other person associated with the Federal Reserve System. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Curcuru, S., T. Dvorak, and F. Warnock, 2008. "Cross-Border Returns Differentials." Quarterly Journal of Economics 123(4): 1495–1530 citation courtesy of