Download publication

Working Paper

Returns on foreign assets and liabilities: exorbitant privileges and stabilising adjustments

Large stock of foreign assets and liabilities could foster international risk diversification. US, British and Japanese investors earn high yields on FDI assets, which might also relate to tax, intellectual property and financial sophistication issues. Valuation changes on net foreign assets had a stabilising impact.

By: and Date: November 29, 2017 Topic: Finance & Financial Regulation

Financial globalisation has led to large increases in foreign assets and liabilities in recent decades, increasing the scope for valuation changes that are potentially greater than trade or financial flows.

We confirm that the United States enjoys an ‘exorbitant privilege’ on flow income from foreign assets, which is primarily related to foreign direct investment (FDI). The geographical allocation of FDI assets explains only a small part of the US yield advantage. The key reason is that US, and also British and Japanese, investors were able to outperform the average yield earned in the countries of their FDI destinations, while most continental European investors earn the average. Further research should explore if large FDI investment in ‘tax optimisation’ countries, the improper consideration of intellectual property, or financial sophistication contributed to these high yields.

For several countries, valuation changes were larger than current account and financial transactions, highlighting the importance of such changes. In the European Union, the generally negative international investment positions of a number of central and southern European countries were greatly supported by EU transfers.

Valuation changes on net foreign assets do not look random and played an important role in the sustainability of international investment positions before and after the 2008 crisis. Countries with negative net international investment positions tend to have positive revaluation gains, while countries with large net foreign assets tend to suffer from revaluation losses. Large net foreign asset holders including China, Saudi Arabia, Switzerland, Japan and Germany, suffered significant losses in 2007-16, helping the sustainability of the negative positions of other countries. Risk sharing was also fostered by losses suffered by the US since 2007. There is no uniform tendency in relation to the asset classes from which these losses arose. Future research should aim to better understand the drivers of these valuation changes.

View comments
Read article Download PDF More on this topic More by this author

External Publication

Examining interrelation between global and national income inequalities

The author contributed to the new issue of 'The Russian Journal of Economics' with a paper on the global dimension of the inequality trends

By: Marek Dabrowski Topic: Global Economics & Governance Date: November 15, 2018
Read article More on this topic More by this author

Blog Post

US mid-term elections and the global economy

Democrats won control of the House and Republicans held onto the Senate in the most consequential US mid-term elections in decades. Bowen Call reviews economists’ and scholars’ analyses of the impact this might have on the world economy.

By: Bowen Call Topic: Global Economics & Governance Date: November 12, 2018
Read about event More on this topic

Upcoming Event

Dec
5
12:30

The future of the External Investment Plan in the next MFF

What are the challenges for implementation of the new EIP?

Speakers: Zsolt Darvas and Mikaela Gavas Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: Options yet open for a Brexit deal

Robin Niblett, director of Chatham House institute, joins Bruegel deputy director Maria Demertzis for an assessment of what progress can be reasonably expected from the final months of the Brexit negotiations.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: November 7, 2018
Read article More on this topic More by this author

Blog Post

Post-Brexit transfers of personal data: The clock is ticking

The UK government would like to keep EU-UK data transfers largely the same following the country's separation from the EU. But talks have yet to even commence on a future data-sharing relationship, and a landmark European Court of Human Rights ruling in September bodes poorly for the UK's future status under the EU’s General Data Protection Regulation.

By: J. Scott Marcus Topic: European Macroeconomics & Governance Date: November 7, 2018
Read about event More on this topic

Upcoming Event

Dec
14
12:30

Investment and Intangible Capital

A presentation of the EIB Investment Report

Speakers: Maria Demertzis and Debora Revoltella Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic

Blog Post

How could voter turnout influence US elections outcome?

Voting is a central pillar of democracy.  The US consistently scores lower than other Western democracies in voter turnout. The authors analyse the possible changes in elections outcome, should the under-represented groups vote.

By: Reinhilde Veugelers and Nick Kingsley Topic: Global Economics & Governance Date: November 3, 2018
Read article More on this topic More by this author

Opinion

The global economy’s three games

In this column, Jean Pisani-Ferry portrays the current international economic and geopolitical order as increasingly reminiscent of chess. Three key players: the US, China and a loose coalition of the other G7 members play three games simultaneously, and no one knows which game will take precedence.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: October 29, 2018
Read article More on this topic More by this author

Blog Post

The rise of 'ethical' investing

We are used to think about the value of investment as measured by financial return. But investing with an eye to environmental or social issues and, more generally, ethical considerations, has become more prominent. We review contributions to this debate.

By: Silvia Merler Topic: Finance & Financial Regulation Date: October 29, 2018
Read article Download PDF More on this topic More by this author

Policy Contribution

Should we give up on global governance?

The pervasive gridlock affecting the traditional global governance approach calls into question the idea of broadening its scope beyond its core remit, and it calls for alternatives, either as substitutes for obsolete arrangements or to address emerging collective action problems in new, inadequately covered fields.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: October 23, 2018
Read article More on this topic More by this author

Opinion

How could Europe benefit from the US-China trade war?

Under pressure from the US, Beijing is set to be more open to making new allies.

By: Guntram B. Wolff Topic: Global Economics & Governance Date: October 18, 2018
Read article More on this topic More by this author

Podcast

Podcast

Backstage: The new balance of Asia-EU-US trade relations

Amid the Asia-Europe Economic Forum on the fringes of the 12th ASEM Summit, Bruegel senior fellow hosts a conversation on developing global trade relations, with guests Moonsung Kang, professor as Korea University, and Michael G. Plummer, director at SAIS Europe – Johns Hopkins University, for an episode of the Bruegel Backstage series on ‘The Sound of Economics’.

By: The Sound of Economics Topic: Global Economics & Governance Date: October 17, 2018
Load more posts