Net foreign assets dynamics: the persistence and sources of shocks to net foreign assets in 12 EU countries

Ong, Kian (2020): Net foreign assets dynamics: the persistence and sources of shocks to net foreign assets in 12 EU countries.

Abstract

The net foreign assets diverge since the early 2000s among the European Union (EU) countries: is this sustainable and what causes the divergence? This paper measures the persistence and the sources of shocks to the net foreign assets of twelve EU countries between 1972 and 2015. There is evidence of external adjustment to changes in external wealth but countries with the highest persistence of shocks see their net foreign assets diverging. The expansion of gross flows leads to this divergence of net foreign assets within the eurozone, implying whilst financial integration diversifies risk, it may lead to external imbalances.

• Item Type: MPRA Paper
• Language: English
• Keywords: net foreign assets, financial integration, persistence
• Subjects: F - International Economics > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements

References

Antonini, Massimo, Kevin C. Lee, and Jacinta Pires. 2013. “Public Sector Debt Dynamics: The Persistence and Sources of Shocks to Debt in 10 EU Countries.” Journal of Money, Credit and Banking 45 (2–3): 277–98. https://doi.org/10.1111/jmcb.12002.

Baldwin, Richard, and Francesco Giavazzi. 2015. The Eurozone Crisis: A Consensus View of the Causes and a Few Possible Remedies. CEPR Press.

Antonini, Massimo, Kevin C. Lee, and Jacinta Pires. 2013. “Public Sector Debt Dynamics: The Persistence and Sources of Shocks to Debt in 10 EU Countries.” Journal of Money, Credit and Banking 45 (2–3): 277–98. https://doi.org/10.1111/jmcb.12002.

Baldwin, Richard, and Francesco Giavazzi. 2015. The Eurozone Crisis: A Consensus View of the Causes and a Few Possible Remedies. CEPR Press.

Beveridge, Stephen, and Charles R. Nelson. 1981. “A New Approach to Decomposition of Economic Time Series into Permanent and Transitory Components with Particular Attention to Measurement of the ‘Business Cycle.’” Journal of Monetary Economics 7 (2): 151–74. https://doi.org/10.1016/0304-3932(81)90040-4.

Blanchard, Olivier, and Francesco Giavazzi. 2002. “Current Account Deficits in the Euro Area: The End of the Feldstein-Horioka Puzzle?” Brookings Papers on Economic Activity 2002 (2): 147–209. https://doi.org/10.1353/eca.2003.0001.

Blanchard, Olivier, and Gian Maria Milesi-Ferretti. 2012. “(Why) Should Current Account Balances Be Reduced.” IMF Economic Review 60 (1): 139–50. https://doi.org/10.1057/imfer.2012.2.

Bleaney, Michael, and Mo Tian. 2014. “Net Foreign Assets and Real Exchange Rates Revisited.” Oxford Economic Papers 66 (4): 1145–58. https://doi.org/10.1093/oep/gpu014.

Bohn, Henning. 2007. “Are Stationarity and Cointegration Restrictions Really Necessary for the Intertemporal Budget Constraint?” Journal of Monetary Economics 54 (7): 1837–47. https://doi.org/10.1016/j.jmoneco.2006.12.012.

Brunnermeier, Markus, and Ricardo Reis. 2019. “A Crash Course on the Euro Crisis.” NBER Working Paper No. 26229. https://doi.org/10.3386/w26229.

Chen, Ruo, Gian Maria Milesi-Ferretti, Thierry Tressel, and Gianluca Benigno. 2013. “External Imbalances in the Eurozone.” Economic Policy 28 (73): 103–42.

Devereux, Michael B, and Changhua Yu. 2019. “International Financial Integration and Crisis Contagion.” The Review of Economic Studies. https://doi.org/10.1093/restud/rdz054.

European Commission. 2012. “Scoreboard for the Surveillance of Macroeconomic Imbalances.” European Economy Occasional Papers. https://doi.org/10.2765/20196.

European Economic Advisory Group. 2012. “The European Balance-of-Payments Problem.” In EEAG Report on the European Economy 2012, 57–81. Munish: CESifo.

Galstyan, Vahagn, Caroline Mehigan, and Rogelio Mercado. 2020. “The Currency Composition of International Portfolio Assets.” Journal of International Money and Finance 103: 102132. https://doi.org/10.1016/j.jimonfin.2019.102132.

Garratt, Anthony, Kevin C. Lee, M. Hashem Pesaran, and Yongcheol Shin. 2012. Global and National Macroeconometric Modelling: A Long-Run Structural Approach. Oxford University Press.

Gourinchas, Pierre-Olivier, and Hélène Rey. 2014. “External Adjustment, Global Imbalances and Valuation Effects.” In Handbook of International Economics, 4:585–645. Elsevier B.V. https://doi.org/http://dx.doi.org/10.1016/B978-0-444-54314-1.00010-0.

Hale, Galina, and Maurice Obstfeld. 2016. “The Euro and the Geography of International Debt Flows.” Journal of the European Economic Association 14 (1): 115–44. https://doi.org/10.1111/jeea.12160.

Im, Kyung So, M. Hashem Pesaran, and Yongcheol Shin. 2003. “Testing for Unit Roots in Heterogeneous Panels.” Journal of Econometrics 115 (1): 53–74. https://doi.org/10.1016/S0304-4076(03)00092-7.

Lane, Philip R., and Gian Maria Milesi-Ferretti. 2001. Long-Term Capital Movements. NBER Macroeconomics Annual. Vol. 16. https://doi.org/10.1162/088933601320224865.

Lane, Philip R., and Gian Maria Milesi-Ferretti. 2003. “International Financial Integration.” IMF Economic Review 50: 82–113. https://doi.org/10.1016/j.jbankfin.2013.08.004.

Lane, Philip R., and Gian Maria Milesi-Ferretti. 2008a. “International Investment Patterns.” The Review of Economics and Statistics 90 (3): 538–49.

Lane, Philip R., and Gian Maria Milesi-Ferretti. 2008b. “The Drivers of Financial Globalization.” American Economic Review 98 (2): 327–32.

Lane, Philip R., and Gian Maria Milesi-Ferretti. 2012. “External Adjustment and the Global Crisis.” Journal of International Economics 88 (2): 252–65. https://doi.org/10.1016/j.jinteco.2011.12.013.

Lane, Philip R., and Gian Maria Milesi-Ferretti. 2018. “The External Wealth of Nations Revisited: International Financial Integration in the Aftermath of the Global Financial Crisis.” IMF Economic Review 66 (1): 189–222. https://doi.org/10.1057/s41308-017-0048-y.

Lane, Philip R. 2013. Capital Flows in the Euro Area. European Economy Economic Papers. https://doi.org/10.2765/43795.

Lee, Kevin C., and M. Hashem Pesaran. 1993. “Persistence Profiles and Business Cycle Fluctuations in a Disaggregated Model of U.K. Output Growth.” Ricerche Economiche 47 (3): 293–322. https://doi.org/10.1016/0035-5054(93)90032-X.

Lee, Kevin C., M. Hashem Pesaran, and Richard G. Pierse. 1992. “Persistence of Shocks and Their Sources in a Multisectoral Model of UK Output Growth.” The Economic Journal 102 (411): 342. https://doi.org/10.2307/2234519.

Lee, Kevin C., R. G. Pierse, and M. H. Pesaran. 1993. “Persistence, Cointegration, and Aggregation. A Disaggregated Analysis of Output Fluctuations in the U.S. Economy.” Journal of Econometrics 56 (1–2): 57–88. https://doi.org/10.1016/0304-4076(93)90101-A.

Obstfeld, Maurice, and Kenneth Rogoff. 1995. “Exchange Rate Dynamics Redux.” Journal of Political Economy 103 (3): 624–60.

Pesaran, M. Hashem. 2007. “A Simple Panel Unit Root Test in the Presence of Cross-Section Dependence.” Journal of Applied Econometrics 22 (2): 265–312. https://doi.org/10.1002/jae.951.

Shin, Hyun Song. 2012. “Global Banking Glut and Loan Risk Premium.” IMF Economic Review 60 (2): 155–92. https://doi.org/10.1057/imfer.2012.6.