External Balances, Trade Flows and Financial Conditions

Evans, Martin (2014): External Balances, Trade Flows and Financial Conditions.

Abstract

This paper studies how changing expectations concerning future trade and financial con- ditions are reflected in international external positions. In the absence of Ponzi schemes and arbitrage opportunities, the net foreign asset position of any country must, as a matter of theory, equal the expected present discounted value of future trade deficits, discounted at the cumulated world stochastic discount factor (SDF) that prices all freely traded financial assets. I study the forecasting implications of this theoretical link in 12 countries (Australia, Canada, China, France, Germany, India, Italy, Japan, South Korea, Thailand, The United States and The United Kingdom) between 1970 and 2011. I find that variations in the ex- ternal positions of most countries reflect changing expectations about trade conditions far into the future. I also find the changing forecasts for the future path of the world SDF is reflected in the dynamics of the U.S. external position.

• Item Type: MPRA Paper
• Language: English
• Keywords: Global Imbalances, Foreign Asset Positions, Current Accounts, Trade Flows, International Asset Pricing
• Subjects: F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems

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