## _wp0828

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---

### I. Introduction
- Rapid growth in cross-border financial trade increases the importance of capital gains and losses on existing holdings in determining net foreign asset dynamics; valuation effects grow with gross international balance sheets (Lane and Milesi-Ferretti 2001, 2007a).
- U.S. experience: average current account deficits of over 5 percent of GDP between 2002 and 2006; cumulative U.S. current account deficit from 1983 to 2006 totaled over $5 trillion while the U.S. IIP worsened by less than $3 trillion over the same horizon.
- Central hypothesis: systematic “residual adjustments” (not linked to measured financial flows or estimated capital gains) play a significant role in the dynamics of the U.S. external position.
  - Residual adjustments arise from refinements or extended coverage in statistical methods capturing international transactions and holdings.
  - If systematic, attributing residual adjustments entirely to capital gains biases measurement of implicit rates of return.
- Objectives:
  - Forensic examination of changes in the U.S. external position to assess whether residual adjustments are attributable to measurement error in (a) financial flows; (b) capital gains; and/or (c) initial positions.
  - Use BEA data and documented BEA revisions to investigate measurement challenges over 1983-2006.

### II. Preliminaries: accounting framework, data, and measurement approach
- Stylized fact: cumulative net capital outflows tend to understate the U.S. external position across sub-periods 1976-1982, 1983-1992, 1993-2001, and 2002-2006; the gap is very large for 2002-2006 (19 percent of GDP when FDI measured at current cost; 25 percent when FDI measured at market value).
- Benchmark decomposition: stocks, flows, and valuation
  - Notation: tVAL is the net capital gain; tkgr is the ‘rate of capital gain’; tF is the financial flow.
  - Simplifying assumption: capital gains from exchange rate and asset price changes are earned on 50 percent of the current-period flow, in addition to the outstanding position inherited from the previous period.
- Measurement error treatment:
  - Observed dynamics include an aggregate measurement error tO; measurement error can affect financial flows, holdings, and capital gains.
  - Two opposing influences over time: financial globalization increases gross assets/liabilities (a constant ‘rate of measurement error’ implies larger percent of GDP), while improvements in data collection/methodologies may reduce the ‘rate of measurement error’.
- Data and methodology:
  - Use BEA stock-flow reconciliation tables (orig and revised series), BEA Survey of Current Business documentation, and implementation of the LMF decomposition method to construct revised valuation and residual terms.
  - Further rounds of adjustments seek to allocate the residual across potential mis-measurement sources to attain a final ‘zero residual’ set of estimates.

### III. The International Investment Position: key features and valuation drivers
- Valuation drivers:
  - U.S. foreign-currency holdings are overwhelmingly in equity-type instruments (FDI and portfolio equity) and are sensitive to asset price fluctuations.
  - U.S. external liabilities are almost entirely denominated in U.S. dollars; valuation effects on liabilities linked to U.S. stock prices and U.S. interest rates.
  - Valuation effects on U.S. external assets are primarily driven by international stock prices measured in U.S. dollars.
- Net valuation contribution by subperiod:
  - Negative during 1983-1992 and 1993-2001; strongly positive during 2002-2006.
  - 1983-1992: similar U.S. and rest-of-world stock price growth; equity liabilities > equity assets → valuation term negative.
  - 1993-2001: U.S. stock prices rose faster than rest-of-world; U.S. dollar appreciation amplified negative net valuation.
  - 2002-2006: U.S. stock prices trailed rest-of-world and U.S. dollar depreciated; larger holdings as share of GDP magnified valuation effects → net valuation contribution strongly positive.
- Implication: valuation gains were central to insulating the U.S. net foreign asset position during 2002-2006 from the consequences of large cumulative current account deficits.

### IV. Residual adjustments: patterns, sources, and implications
- Residual term properties:
  - Residual adjustments often arise from coverage changes, capital gains/losses of affiliates, and other adjustments to asset/liability values.
  - Residual adjustment term is consistently positive across periods; net residual roughly stable as a percentage of GDP across periods while gross residuals for foreign assets and liabilities have increased sharply in recent years.
  - Residuals tend to be positive for foreign assets, and have been negative in some periods for foreign liabilities.
- Empirical diagnostics (survey-driven revisions and measurement issues):
  - Portfolio debt:
    - 1994 U.S. Treasury survey (first since 1943) contributed to residuals for 1983-92 and 1993-2001.
    - 2003 portfolio survey highlighted a $375 billion discrepancy relative to the 2001 survey and 2002-2003 flows — described as 75 percent of portfolio debt asset holdings; led to bond outflow revision of $120 billion for 2002-03 but a large residual remained.
    - March 2000 liability survey found foreign U.S. bond holdings $400bn lower than previously estimated; BEA revised bond inflows for 1995-1999 downward but residual persisted.
  - Portfolio equity:
    - 1994 portfolio survey revised U.S. holdings of foreign equities upward by about $300bn (4 percent of GDP and 75 percent of previously estimated holdings) for 1984-1993; flows not revised → large residual.
    - 1997 survey identified equity holdings $200bn higher than estimated; introduced equity outflows of about $60 billion.
    - End-2005 portfolio survey found U.S. equity holdings exceeding estimates by over $200 billion (7.5 percent of the initially estimated stock).
  - FDI:
    - BEA has high confidence in FDI data quality due to quinquennial surveys, but “other” adjustments (valuation shifts, realized gains of affiliates) are a primary source of residuals.
    - For FDI at current cost, net residual term positive and higher than for FDI at market value.
  - Banks and non-banks (non-portfolio):
    - TIC system collects end-of-period positions; flows inferred from changes in positions net of adjustments.
    - Residuals plausibly due to changes in coverage as surveys expanded and new reporters were included.

### V. Zero-residual re-allocation methodology and illustrative scenario
- Formal framework for reallocations:
  - If residual allocated to unrecorded flows → revisions to FLOW, VAL, POS and recalculated rate of capital gain kgr via equations (9)–(11).
  - If residual allocated to mis-measured capital gains → new VAL and kgr via equations (12)–(13).
  - If residual allocated to mis-measured initial positions → adjusted positions reconstructed backward via equation (14) and flows/valuation recomputed via (15)–(16).
- Illustrative allocation guided by diagnostics:
  - Portfolio positions: allocate residuals to mis-measured flows (positions considered well measured due to annual surveys; BEA ‘rate of capital gain’ based on market returns considered good proxy).
  - FDI positions: allocate residuals to mis-measured capital gains (FDI valuation difficult due to unlisted assets and host-country index proxies).
  - Non-portfolio (banks and non-banks): allocate residuals to mis-measured initial positions (coverage expansions explain residuals).
- Implications of illustrative reallocations (text summary of Table 8):
  - Revised net portfolio outflows higher than measured outflows in all sample periods—by about 1 percent of GDP a year for 2002-2006.
  - Net portfolio equity flows dominate the difference for 1983-1992; net bond outflows dominate for 1993-2006.
  - Larger role for valuation changes arises from valuation gains on larger net portfolio outflows and on FDI.
  - For non-portfolio holdings, expanded survey scope implies past holdings and flows may have been underestimated, implying somewhat faster deterioration in U.S. external position than official data indicate.
  - Aggregate implication: raises estimated net financial outflows from the United States by around 0.6 percent of GDP per year since 1983.
  - Under this scenario, absent revisions to the current account, ceteris paribus the measured U.S. current account deficit has exceeded net financial outflows by around 0.7 percent of GDP a year on average since the early 1980s.
  - Financial-account revisions would have one-order-of-magnitude smaller direct impact on the current account than the financial-account revisions themselves.

### VI. Sensitivity analysis: fractional allocation parameter α
- Flexible allocation: attribute fraction α of the portfolio residual to mis-measured flows and remainder to mis-measured initial stock; corrected flows and revised stocks computed via equations (17)–(20).
- α values analyzed: 0, ¼, ½, ¾, 1.
- Main sensitivity results:
  - Choice of α has little effect in most recent years but considerable dispersion in earlier periods.
  - Example numeric effects:
    - If α = ½ then the 1996 net foreign asset position would be 5 percentage points stronger and the 1983 position 11 percentage points stronger.
    - If α = 0 then the 1996 position 10 percentage points stronger and the 1983 position 22 percentage points stronger.
  - Investment income implications for α = ½:
    - Net investment income balance would improve by an annual average of 0.8 percent of GDP during 1983-1989 and 0.3 percent of GDP during 1990-1999.
- Authors’ view: high-α scenarios (attributing most residual to flows) are doubtful because they imply implausibly large portfolio asset holdings in early years and simply shift mismeasurement backward in time; nonetheless some underestimation of U.S. external assets in earlier years is plausible.

### VII. Rates of capital gain and full-residual allocations
- Full-residual allocation to capital gains produces much higher estimated rates of capital gain on portfolio equity and debt assets than market-return-based BEA estimates; in some periods these estimates are clearly not realistic.
- Representative rates (Table 7, in percent):
  - Portfolio Equity Assets Full residual: 21.5 | 10.5 | 16.5
    - BEA/LMF: 9.4 | 7.2 | 13.4
  - Portfolio Equity Liabilities Full residual: 9.6 | 12.4 | 7.9
    - BEA/LMF: 9.8 | 10.9 | 4.4
  - Portfolio Debt Assets Full residual: 5.1 | 1.6 | 8.5
    - BEA/LMF: 1.7 | -1.1 | 2.2
  - Portfolio Debt Liabilities Full residual: 0.8 | -1.4 | -1.5
    - BEA/LMF: -0.1 | 0.3 | -0.4
  - Total Assets (FDI at current cost) Full residual: 2.4 | 2.3 | 7.3
    - BEA/LMF: 0.2 | 1.2 | 5.1
  - Total Liabilities (FDI at current cost) Full residual: 1.9 | 0.8 | 0.9
    - BEA/LMF: 1.5 | 1.6 | 1.2
- Aggregate valuation-return differentials and sensitivity:
  - Price and exchange rate valuation effects account for a 4 percent return differential between assets and liabilities when FDI measured at current cost.
  - Price and exchange rate valuation effects account for a 5½ percent return differential when FDI measured at market value.
  - Attributing the entire residual to capital gains raises the return differential between capital gains on assets and liabilities by about 2 percentage points.

### VIII. Key quantitative findings (preserved exact values)
- $200bn (1997 survey upward revision of U.S. residents’ foreign equity holdings).
- $60 billion (total introduced equity outflows associated with that correction).
- Over $200 billion (end-2005 portfolio survey excess over estimates for end-2004-based estimates and 2005 outflows).
- 7.5 percent (the $200+ billion difference as a share of initially estimated stock of U.S. portfolio equity assets).
- 4 percent (return differential from price and exchange rate valuation effects when FDI measured at current cost).
- 5½ percent (return differential when FDI measured at market value).
- 2 percentage points (increase in return differential if entire residual attributed to capital gains).
- Around 0.6 percent of GDP per year (increase in estimated net financial outflows from the United States under illustrative scenario since 1983).
- Around 0.7 percent of GDP per year (implication that measured U.S. current account deficit exceeds net financial outflows on average since early 1980s under illustrative scenario).
- α values considered: 0, ¼, ½, ¾, 1.
- α = ½ example effects: 1996 net foreign asset position 5 percentage points stronger; 1983 position 11 percentage points stronger.
- α = 0 (extreme) example effects: 1996 position 10 percentage points stronger; 1983 position 22 percentage points stronger.
- Investment income improvements for α = ½: annual average of 0.8 percent of GDP during 1983-1989 and 0.3 percent of GDP during 1990-1999.
- Table highlights (selected exact entries):
  - Table 1: Net Gap (FDI current cost) in latest period: 18.9.
  - Table 2 (LMF valuation, 2002-2006): Valuation LMF (assets, FDI at current cost): 17.1; Valuation LMF (liabilities, FDI at current cost): 5.0; Valuation LMF (net, FDI at current cost): 12.1.
  - Table 3 (Residual LMF, 2002-2006): Residual LMF (assets, FDI at current cost): 16.4; Residual LMF (liabilities, FDI at current cost): 8.9; Residual LMF (net, FDI at current cost): 7.5.
  - Table 4 (Portfolio Debt residuals, 2002-2006): Residual (Assets): 1.8; Residual (Liabilities): -2.3; Residual (Net): 4.1.
  - Table 4 (Portfolio Equity residuals, 2002-2006): Residual (Assets): 2.6; Residual (Liabilities): 2.0; Residual (Net): 0.6.
  - Table 5 (FDI market value, 2002-2006): Valuation (Net): 8.4; Residual (Net): 0.5.
  - Table 6 (Banks and Non-Banks residual net, 2002-2006): Residual (Net): 0.7.
  - Table 8 (Net Impact of Re-Allocation, 2002-2006): Portfolio Debt Net Flows: 4.0; Portfolio Equity Net Flows: 0.5; Banks and Non-Banks Net Flows: -0.1; Position (Banks and Non-Banks): -0.8.

### IX. Conclusions and policy-relevant implications
- Residual adjustments have on average contributed to improving the measured U.S. external position; residuals plausibly reflect a mix of:
  - Unrecorded financial flows (especially portfolio),
  - Mis-measured initial positions (non-portfolio banks/non-banks),
  - Some mis-measured capital gains (notably FDI).
- Attributing the entire residual to capital gains would raise measured return differentials by about 2 percentage points, but this is unlikely given source diagnostics.
- Plausible reallocations suggest net financial flows to the United States over the past 25 years may have been overstated by up to 0.6 percent of GDP per year, implying the U.S. average current account deficit could exceed net financial outflows by up to 0.7 percent of GDP on average during this period — resolving one puzzle creates another.
- Price and exchange rate valuation gains (asset price developments and U.S. dollar depreciation) remain central to understanding the relative stability of the U.S. external position during 2002-2006; such gains cannot be simply extrapolated into the future without implications for U.S. inflation and interest rates.
- Factors that could cushion future deterioration:
  - Positive yield and return differential between U.S. external assets and liabilities (reduces required trade-balance adjustment).
  - Shift in composition of the U.S. balance sheet toward equity and FDI on the asset side (greater capital-gain potential), while liabilities have seen a growing debt share—this asymmetry could imply net capital gains on average but increases vulnerability to shifts in investor risk appetite.
- Ongoing challenges: rapid financial innovation and growth in cross-border investors mean residuals and stock-flow reconciliation will remain challenging; researchers should devise sensible allocation methods for residuals to make robust assessments of financial flows and valuation gains.

*Source: _wp0828 - References (PDF chapter/section).*

### References................................................................................................20

### _wp0828 - References................................................................................................20

### I. Introduction
- Rapid growth in cross-border financial trade increases importance of capital gains and losses on existing holdings in determining net foreign asset dynamics; valuation effects grow with gross international balance sheets (Lane and Milesi-Ferretti 2001, 2007a).
- U.S. experience highlights divergence between the current account and change in net foreign assets:
  - Average current account deficits of over 5 percent of GDP between 2002 and 2006.
  - Cumulative U.S. current account deficit from 1983 to 2006 totaled over $5 trillion.
  - U.S. IIP worsened by less than $3 trillion over the same horizon.
- Possible explanations for the divergence:
  - Capital gains from asset prices and exchange rates implying higher returns on U.S. external assets than foreign returns on U.S. assets (Gourinchas and Rey 2007b; Lane and Milesi-Ferretti 2007b).
  - Alternative findings that average market rates of return on comparable instruments do not display large differences (Curcuru, Dvorak, and Warnock 2007).
  - Claims that measured return differentials reflect underestimation of U.S. external assets (Hausmann and Sturzenegger, 2007).
- Central hypothesis emphasized in this paper: systematic “residual adjustments” (not linked to measured financial flows or estimated capital gains) play a significant role in the dynamics of the U.S. external position.
  - Residual adjustments arise from refinements or extended coverage in statistical methods capturing international transactions and holdings.
  - If systematic, attributing residual adjustments entirely to capital gains biases measurement of implicit rates of return.
- Objectives:
  - Conduct a “forensic” examination of changes in the U.S. external position to assess whether residual adjustments are attributable to measurement error in (a) financial flows; (b) capital gains; and/or (c) initial positions.
  - Use BEA data (detailed breakdown of IIP) and documented BEA revisions to investigate measurement challenges over 1983-2006.
- Relevance:
  - Implications for the likely future path of the U.S. external position and sustainability of current account deficits.
  - Importance for open-economy macroeconomic models with endogenous international portfolios.

### II. Preliminaries
- Stylized fact: cumulative net capital outflows tend to understate the U.S. external position across sub-periods 1976-1982, 1983-1992, 1993-2001, and 2002-2006.
  - Gap is modest in first three periods; very large for 2002-2006:
    - 19 percent of GDP when FDI is measured at current cost.
    - 25 percent when FDI is measured at market value.
- Table 1 (referenced) indicates the gap between financial flows and change in positions is primarily driven by the asset side—consistent with capital outflows being more difficult to track than inflows (Lane and Milesi-Ferretti 2007a).
- Benchmark accounting decomposition for stocks, flows, and valuation:
  - Equations for dynamics of external assets and liabilities are reported as (1) and (2) with notation:
    - tVAL is the net capital gain.
    - tkgr is the ‘rate of capital gain’.
    - tF is the financial flow.
  - Simplifying assumption: capital gains from exchange rate and asset price changes are earned on 50 percent of the current-period flow, in addition to the outstanding position inherited from the previous period.
- Measurement error treatment:
  - Observed dynamic equations shown as (3) and (4) where superscript M denotes measured values and tO is aggregate measurement error.
  - Measurement error can affect financial flows, holdings, and capital gains.
  - Two opposing influences over time:
    - Financial globalization increases gross assets/liabilities, so a constant ‘rate of measurement error’ translates into a larger percentage of GDP.
    - Improvements in data collection and methodologies may reduce the ‘rate of measurement error’.
- Data and empirical methodology:
  - BEA releases official U.S. IIP estimate in June for the end of the previous year and publishes a stock-flow reconciliation table decomposing change into financial flows, valuation gains (price and exchange rate), and ‘other’ changes (coverage, capital gains/losses of direct investment affiliates, other adjustments).
  - BEA subsequently revises IIP estimates; Survey of Current Business documents revisions and reasons.
  - An updated reconciliation table encompassing subsequent revisions to stock, flow, and valuation data is available for 1989-2006 (Clarida et al (2007) referenced).
- Measurement approach used in paper:
  - Use original stock-flow reconciliation: equation (5) (orig superscript) with POS, F, MVVAL, XRVAL, RESID.
  - Rate of capital gain computed as in equation (6) using orig data and 0.5 factor.
  - BEA calculates capital gains by applying yield-stripped rates of return from market indices to estimated position data.
  - Revised valuation term constructed as equation (7) with rev superscript; revised residual term derived in equation (8).
  - Further rounds of adjustments (Section IV) seek to allocate the residual across potential mis-measurement sources to attain a final ‘zero residual’ set of estimates.

### III. The International Investment Position: Key Features
- Valuation gains depend critically on asset and currency composition:
  - U.S. foreign-currency holdings are overwhelmingly in equity-type instruments (FDI and portfolio equity), sensitive to asset price fluctuations.
  - U.S. external liabilities are almost entirely denominated in U.S. dollars; FDI and portfolio equity liabilities are most sensitive to asset price fluctuations because most debt liabilities are of relatively short maturity.
  - Valuation effects on U.S. external assets are primarily driven by international stock prices measured in U.S. dollars.
  - Valuation effects on U.S. external liabilities are linked to U.S. stock prices and U.S. interest rates given the significant size of U.S. bond liabilities.
- Quantitative contribution of valuation changes to the GAP:
  - Tables 2 (referenced) report two measures of valuation changes:
    - One derived from revised BEA stock-flow reconciliation table (1989-2006).
    - One based on the decomposition method for individual asset and liability series described in the methodology.
- Residual adjustments and their implications:
  - Residual adjustments often arise from coverage changes, capital gains/losses of affiliates, and other adjustments to asset/liability values.
  - Because residual adjustments follow a systematic pattern in U.S. data, attributing them entirely to capital gains affects measurement of rate-of-return differentials and interpretation of sustainability of current account deficits.

*Source: _wp0828 - References................................................................................................20*

### section 2 (implemented back to 1983 and labeled LMF).

### _wp0828 - section 2 (implemented back to 1983 and labeled LMF)

### Valuation effects: patterns and explanations
- Net valuation contribution:
  - Negative during 1983-1992 and 1993-2001.
  - Turned strongly positive during 2002-2006.
- Explanations by subperiod:
  - 1983-1992:
    - U.S. and rest-of-world stock prices increased at similar rates (in a common currency).
    - U.S. equity liabilities were significantly larger than U.S. equity assets → valuation term negative.
  - 1993-2001:
    - U.S. stock prices rose much more rapidly than those in the rest of the world.
    - Appreciation of the U.S. dollar amplified the effect → sharply negative net valuation effects.
  - 2002-2006:
    - U.S. stock prices trailed rest-of-world stock prices and the U.S. dollar depreciated significantly.
    - Much larger holdings of external assets and liabilities as a share of GDP than in earlier periods → valuation effects magnified and net valuation contribution strongly positive.
- Implication:
  - Valuation gains were central to the insulation of the U.S. net foreign asset position during 2002-2006 from the consequences of a cumulatively large current account deficit.

### Valuation effects versus stock-flow discrepancies and residuals
- Valuation effects’ explanatory power:
  - Go a significant way towards explaining stock-flow discrepancies in 2002-2006.
  - Widen the discrepancy between stocks and flows during 1983-92 and 1993-2001.
- Residual adjustment term:
  - Consistently positive throughout each period.
  - Approximation to the calculation of the ‘residual’ term matches BEA residuals closely.
  - Net residual roughly stable as a percentage of GDP across periods.
  - Gross residuals for foreign assets and liabilities have increased sharply in recent years (documented in Table 3).
  - Residuals tend to be positive for foreign assets but have been negative in some periods for foreign liabilities.
- Research focus:
  - Investigate whether residuals reflect hidden capital gains, unrecorded flows, or mis-measured initial positions by examining timing and sources of ‘residual’ adjustments using BEA IIP documentation and revisions.

### Components of the international balance sheet: data sources and method
- Approach:
  - Construct updated ‘residual’ adjustments for individual IIP series using the decomposition method from Section II.
  - Interpret measurement issues based on detailed annual BEA articles describing IIP components, sources of revisions, and TIC flow data adjustments to align with balance-of-payments concepts.
  - Use U.S. Treasury surveys of U.S. portfolio assets and liabilities as additional information.
- Note on data limitation:
  - Decomposition of changes in holdings of FDI at market value for 1983-1992 hampered by BEA not releasing stock-flow reconciliation details for that category prior to 1989.
  - For calculations, assumed entire difference between change in stock of FDI assets and liabilities at market value and respective flows for 1983-92 ascribable to price and exchange rate valuation effects.

### Portfolio assets and liabilities — Bonds (portfolio debt)
- Trend:
  - Net portfolio debt position of the United States steadily grew more negative over the whole sample period.
- Role of valuation gains:
  - Played a modest role, partly because of the relatively small foreign-currency component in portfolio debt assets and liabilities.
- Main source of gap between cumulative flows and change in positions:
  - Residual adjustments.
- Residual pattern:
  - Consistently positive for portfolio debt assets (assets increase more than indicated by cumulative foreign bond purchases adjusted for estimated valuation changes).
  - Negative for portfolio debt liabilities.
- Survey and measurement issues:
  - 1994 U.S. Treasury survey of portfolio asset holdings overseas was the first since 1943 — lack of survey data contributed to residuals for 1983-92 and 1993-2001.
  - 2003 portfolio survey highlighted a $375 billion discrepancy relative to the 2001 survey and 2002-2003 flows — described as 75 percent of portfolio debt asset holdings.
    - Led to strengthened data collection and a revision in bond outflows for 2002-03 of $120 billion, but a very significant residual gap remained.
  - For portfolio debt liabilities, March 2000 portfolio liability survey found foreign U.S. bond holdings to be $400bn lower than previously estimated (based on 1994 survey and subsequent flows).
    - Shortcomings identified: incomplete reporting of redemptions of maturing securities and lack of coverage of principal repayments on asset-backed securities.
    - BEA revised downwards bond inflows for 1995-1999, accounting for about half of the residual for Treasury securities and a larger share for agency and corporate bonds, though a remaining residual persisted.
  - For 2002-2006, annual surveys available; June 2003 and June 2005 portfolio liability surveys found foreign holdings of U.S. bonds well below levels estimated from previous surveys and flows → likely overestimation of bond inflows; flow data not substantially revised → residual remains important.

### Portfolio assets and liabilities — Equity holdings
- Aggregate movement:
  - Portfolio equity assets and liabilities increased by similar amounts during 1983-2001, with only a minor shift in the net position.
  - Net portfolio equity position improved by 12 percentage points of GDP during 2002-2006.
    - Primary driver: large positive differential between valuation gains on foreign equity assets relative to equity liabilities.
- Residuals by side:
  - Residual terms on the asset side have been positive and significant in all periods, exceeding those on the liability side (expressed as a ratio to GDP).
- Key survey-driven revision:
  - 1994 portfolio survey identified much larger U.S. holdings of foreign equities than previously estimated by the BEA — a difference of about $300bn — 4 percent of GDP and 75 percent of previously estimated holdings.
    - Stocks of portfolio equity asset holdings were revised upwards for 1984-1993, but portfolio equity flows for these years were not revised → large residual adjustment term.
- Interpretations of the 1984-94 residual for portfolio equity:
  - If attributed to additional valuation effects:
    - Would imply a rate of return on portfolio equity holdings exceeding the ones calculated from the MSCI world minus U.S. index — or from the BEA adjustment method — by about 10 percentage points per year for that decade.
  - If attributed to underestimated flows:
    - Would imply a decline in U.S. net borrowing (the U.S. financial account balance) by about [text cutoff in source].

*Source: _wp0828 - section 2 (implemented back to 1983 and labeled LMF).*

### 0.3 percentage points of GDP per year for the period 1984-94.

### _wp0828 - 0.3 percentage points of GDP per year for the period 1984-94.

### Portfolio measurement issues, survey corrections, and residuals
- 1997 survey identified equity holdings by U.S. residents overseas which were $200bn higher than estimated; this corrected positions for 1994-1997 and introduced equity outflows by about $60 billion in total, leaving a significant positive residual.
- For 2002-2006, the portfolio survey for end-2005 found U.S. equity holdings exceeding estimates (based on end-2004 survey and 2005 equity outflows) by over $200 billion; this difference is 7.5 percent of the initially estimated stock of U.S. portfolio equity assets.
- Portfolio equity liabilities show a positive residual largest for 2002-2006, primarily due to 2002 and 2003 surveys identifying higher holdings than predicted by past surveys and subsequent flow and valuation data.
- Overall conclusion for portfolio instruments: measurement problems with financial flows over time have contributed significantly to the residual term; underestimation in net portfolio outflows remains a plausible explanation for gaps, particularly for bonds.

### Foreign Direct Investment (FDI) and valuation adjustments
- Net FDI position improved substantially over 2002-2006, especially at market value, by considerably more than cumulative net outflows; price and exchange rate valuation effects are the key factor, with the net valuation term shifting from negative to positive between 1993-2001 and 2002-2006.
- BEA has high confidence in FDI data quality and coverage due to quinquennial surveys.
- Primary source of “other” adjustments in FDI: valuation shifts not captured by regular “price” and “exchange rate” components (e.g., once-off gain from disposal above recorded book value).
- For FDI at current cost, the net residual term has been positive and higher than for FDI at market value; current-cost accounting requires an adjustment because flows are measured at market value and do not capture change in current-cost value.
- Attribution of residuals to FDI valuation is plausible because some “other” adjustments are akin to realized capital gains/losses of direct investment affiliates.

### Non-portfolio positions of banks and non-banks
- Non-portfolio category (loans, bank deposits and short-term paper, trade credits) is primarily driven by cumulative flows, but a significant residual partially offsets the negative impact of large net capital inflows.
- TIC system collects end-of-period positions; flows are inferred from changes in positions net of adjustments.
- Capital gains are limited in this category; stock-flow discrepancies are primarily due to changes in coverage as surveys expanded over time.
- Most plausible explanation for residual: changes in coverage—estimated flows reflect reporters in earlier coverage while residuals reflect positions of new reporters.

### ‘Zero residual’ re-allocation methodology (formal framework)
- If residual fully allocated to unrecorded financial flows, revisions occur to net flows and valuation effects because valuation gains/losses accrue on within-year flows. (Equations (9)–(11) establish algebraic relationships for revised FLOW, VAL, POS and 'rate of capital gain' kgr.)
- If residual allocated to mis-measured capital gains, new estimates for valuation term and ‘rate of capital gain’ follow equations (12)–(13).
- If residual allocated to mis-measured initial position, adjusted positions are reconstructed backward from the final year rev iT POS using equation (14); flows and capital gains recomputed via (15)–(16).

### Residual as capital gain: implications and magnitudes
- Full-residual allocation to capital gains produces much higher estimated rates of capital gain on portfolio equity and debt assets than market-return-based BEA estimates; in some periods (1980s for portfolio equity, first and last period for bonds) these are clearly not realistic.
- On liabilities side, estimates are more similar between full-residual and market-return approaches.
- For FDI, attributing residual to valuation gains raises the difference in capital gains and returns between external assets and liabilities for current-cost measures; both methods generate similar estimates for FDI at market value.
- For total external assets and liabilities in the most recent period:
  - Price and exchange rate valuation effects account for a 4 percent return differential between assets and liabilities when FDI is measured at current cost.
  - Price and exchange rate valuation effects account for a 5½ percent return differential when FDI is measured at market value.
  - Attributing the entire residual to capital gains raises the return differential between capital gains on assets and liabilities by about 2 percentage points.

### Illustrative re-allocation scenario (guided by measurement-source diagnostics)
- Principal allocations:
  - Portfolio positions: residuals allocated to mis-measured flows (positions considered well measured due to annual surveys; BEA ‘rate of capital gain’ based on market returns considered a good proxy).
  - FDI positions: residuals allocated to mis-measured capital gains (FDI valuation is difficult due to unlisted assets and host-country index proxies).
  - Non-portfolio positions of banks and non-banks: residuals allocated to mis-measured initial positions (coverage expansions explain residuals).
- Implications shown in Table 8 (text summary):
  - Revised net portfolio outflows would be higher than measured outflows in all three sample periods—by about 1 percent of GDP a year for 2002-2006.
  - Net portfolio equity flows dominate the difference for 1983-1992; net bond outflows dominate for 1993-2006.
  - Larger role for valuation changes arises from valuation gains on larger net portfolio outflows and those on FDI.
  - For non-portfolio holdings, expanded survey scope implies past holdings and flows may have been underestimated, implying somewhat faster deterioration in U.S. external position than official data indicate.
- Aggregate implication of this illustrative scenario:
  - Raises estimated net financial outflows from the United States by around 0.6 percent of GDP per year since 1983.
  - Absent revisions in the estimated current account position, ceteris paribus this implies the measured U.S. current account deficit has exceeded net financial outflows by around 0.7 percent of GDP a year on average since the early 1980s.
  - Financial-account revisions would have one-order-of-magnitude smaller direct impact on the current account than the financial-account revisions themselves.

### Sensitivity analysis (fractional allocation α)
- Flexible approach: attribute fraction α of the portfolio residual to mis-measured flows and remainder to mis-measured initial stock. Corrected flows and revised stocks computed via equations (17)–(20).
- Values of α analyzed: 0, ¼, ½, ¾, 1.
- Main results:
  - Choice of α has little effect in most recent years but considerable dispersion in earlier periods.
  - Example: if α = ½ then the 1996 net foreign asset position would be 5 percentage points stronger and the 1983 position 11 percentage points stronger.
  - Extreme case α = 0 implies 1996 position 10 percentage points stronger and 1983 position 22 percentage points stronger.
- Investment income implications:
  - For α = ½, prevailing yields on portfolio debt and equity during the 1980s and 1990s imply net investment income balance would improve by an annual average of 0.8 percent of GDP during 1983-1989 and 0.3 percent of GDP during 1990-1999.
- Authors’ view: high-α scenarios (attributing most residual to flows) are doubtful because they imply implausibly large portfolio asset holdings in early years and simply shift mismeasurement backward in time; nonetheless some underestimation of U.S. external assets in earlier years is plausible.

### Key quantitative findings and magnitudes (preserved)
- $200bn (1997 survey upward revision of U.S. residents’ foreign equity holdings).
- $60 billion (total introduced equity outflows associated with that correction).
- Over $200 billion (end-2005 portfolio survey excess over estimates for end-2004-based estimates and 2005 outflows).
- 7.5 percent (the $200+ billion difference as a share of initially estimated stock of U.S. portfolio equity assets).
- 4 percent (return differential from price and exchange rate valuation effects when FDI measured at current cost).
- 5½ percent (return differential when FDI measured at market value).
- 2 percentage points (increase in return differential if entire residual attributed to capital gains).
- Around 0.6 percent of GDP per year (increase in estimated net financial outflows from the United States under illustrative scenario since 1983).
- Around 0.7 percent of GDP per year (implication that measured U.S. current account deficit exceeds net financial outflows on average since early 1980s under illustrative scenario).
- α values considered: 0, ¼, ½, ¾, 1.
- α = ½ example effects: 1996 net foreign asset position 5 percentage points stronger; 1983 position 11 percentage points stronger.
- α = 0 (extreme) example effects: 1996 position 10 percentage points stronger; 1983 position 22 percentage points stronger.
- Investment income improvements for α = ½: annual average of 0.8 percent of GDP during 1983-1989 and 0.3 percent of GDP during 1990-1999.

### Conclusions and policy-relevant implications
- Residual adjustments have on average contributed to improving the measured U.S. external position; residuals plausibly reflect a mix of unrecorded financial flows (especially portfolio), mis-measured initial positions (non-portfolio banks/non-banks), and some mis-measured capital gains (notably FDI).
- Attributing the entire residual to capital gains would raise measured return differentials by about 2 percentage points, but this is unlikely given source diagnostics.
- Alternative, plausible reallocations suggest net financial flows to the United States over the past 25 years may have been overstated by up to 0.6 percent of GDP per year, implying the U.S. average current account deficit could exceed net financial outflows by up to 0.7 percent of GDP on average during this period — resolving one puzzle creates another.
- Price and exchange rate valuation gains (asset price developments and U.S. dollar depreciation) remain central to understanding the relative stability of the U.S. external position over the past 5 years despite record external borrowing; however, such gains cannot be simply extrapolated into the future without implications for U.S. inflation and interest rates.
- Two factors that could cushion future deterioration of the U.S. external position:
  - Positive yield and return differential between U.S. external assets and liabilities (reduces required trade-balance adjustment).
  - Shift in the composition of the U.S. international balance sheet toward equity and FDI on the asset side (greater capital-gain potential), while liabilities have seen a growing debt share—this asymmetry could imply net capital gains on average but increases vulnerability to shifts in investor risk appetite.
- Ongoing challenges: rapid financial innovation, growth in cross-border investors, and complexity of transactions mean residuals and stock-flow reconciliation will remain challenging; researchers should devise sensible allocation methods for residuals to make robust assessments of the roles of financial flows and valuation gains.

*Source: _wp0828 - 0.3 percentage points of GDP per year for the period 1984-94.*

### References

### _wp0828 - References

### References
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- Buiter, Willem, 2006, “Dark Matter or Cold Fusion?” Goldman Sachs Global Economics Paper no. 136, January.
- Cavallo, Michele and Cédric Tille, 2006, “Could Capital Gains Smooth a Current Account Rebalancing?”, Federal Reserve Bank of New York Staff Report 237
- Clarida, Richard, Manuela Goretti, and Mark Taylor, 2007, “Are There Thresholds of Current Account Adjustment in the G7?,” in Clarida, R. (ed.) G7 Current Account Imbalances: Sustainability and Adjustment, The University of Chicago Press, 169-200.
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- Cline, Bill, 2005, The United States as a Debtor Nation, Institute for International Economics and Center for Global Development.
- Curcuru, Stephanie E., Tomas Dvorak and Frank Warnock, 2007, “The Stability of External Imbalances: The Role of Return Differentials,” NBER Working Paper No. 13074.
- Devereux, Michael B. and Alan Sutherland, 2006, “Solving for Country Portfolios in Open Economy Macro Models,” CEPR Discussion Paper 5966, November.
- Gourinchas, Pierre-Olivier and Hélène Rey, 2007a, “From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege”, Clarida, R. (ed.) G7 Current Account Imbalances: Sustainability and Adjustment, The University of Chicago Press, 11-55.
- Gourinchas, Pierre-Olivier and Hélène Rey, 2007b, “International Financial Adjustment,” Journal of Political Economy 115 no. 4, August, 665–703.
- Griever, William, G Lee and Frank Warnock, 2001, “The US System for Measuring Cross-Border Investment in Securities: A Primer with Discussion of Recent Developments,” Federal Reserve Bulletin 87(10), 633-650.
- Gros, Daniel, 2006a, “Foreign Direct Investment in the U.S. (I): Disappearing into a Black Hole?” CEPS Working Document no. 242, April.
- Gros, Daniel, 2006b, “Foreign Investment in the US (II):Being Taken to the Cleaners?” CEPS Working Document no. 243, April.
- Hausmann, Ricardo and Federico Sturzenegger, 2006 “Global Imbalances or Bad Accounting? The Missing Dark Matter in the Wealth of Nations and Its Implications for Global Imbalances,” Economic Policy 22 (July), 469-518.
- Heath, Alexandra, 2007, “What Explains the U.S. Net Income Balance?” BIS Working Paper 223, January.
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- Ihrig, Jane and Jaime Marquez, 2006, “Modeling Direct Investment Valuation Adjustments and Estimating Quarterly Positions,” Federal Reserve Board International Financial Discussion Paper No. 857.
- Kitchen, John, 2007, “Sharecroppers or Shrewd Capitalists? Projections of the US Current Account, International Income Flows, and Net International Debt,” Review of International Economics 15 no. 5 (November), 1036-1061.
- Landefeld, J. Steven and Ann M. Lawson, 1991, “Valuation of the U.S. Net International Investment Position,” Survey of Current Business, May, 40-49.
- Lane, Philip R., and Gian Maria Milesi-Ferretti, 2001, “The External Wealth of Nations: Measures of Foreign Assets and Liabilities for Industrial and Developing Countries,” Journal of International Economics, Vol. 55, pp. 263–94.
- Lane, Philip R., and Gian Maria Milesi-Ferretti, 2003, “International Financial Integration,” IMF Staff Papers, Vol. 50 Special Issue, pp. 82–113 (Washington, D.C.: International Monetary Fund).
- Lane, Philip R., and Gian Maria Milesi-Ferretti, 2005, “Financial Globalization and Exchange Rates,” IMF Working Paper 05/03, January.
- Lane, Philip R., and Gian Maria Milesi-Ferretti, 2007a, “The External Wealth of Nations Mark II,” Journal of International Economics 73 no. 2 (November), 223-50.
- Lane, Philip R., and Gian Maria Milesi-Ferretti, 2007b, “A Global Perspective on External Positions,” in Clarida, R. (ed.) G7 Current Account Imbalances: Sustainability and Adjustment, The University of Chicago Press, 67-98.
- McGuire, Patrick, 2004, “A shift in London’s eurodollar market”, BIS Quarterly Review, September, 67–78.
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- Survey of Current Business, various issues. “The U.S. International Investment Position”, July.
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### Figures (titles and captions)
- Figure 1. Net International Investment Position and Cumulative Financial Outflows (in percent of GDP)
  - A. FDI at current cost
  - B. FDI at market value
- Figure 2. Net International Investment Position and Cumulative Valuation-Adjusted Financial Outflows (in percent of GDP)
  - A. FDI at current cost
  - B. FDI at market value
- Figure 3. U.S. IIP: Stock-Flow Residual (in percent of GDP)
  - Note: The “BEA” line plots the ratio to GDP of “other changes” (from the table “Components of changes in the net international investment position.” The LMF line plots our estimates of “other changes” derived from the individual asset and liability series and BEA data.
- Figure 4. Decomposition of Stock-Flow Residual (in percent of GDP)
- Figure 5. Implications of Alternative Scenarios for Net Foreign Asset Position

### Tables — key statistics and measures (values preserved exactly as in source)
- Table 1. The Dynamics of the U.S. International Investment Position, 1976-2006 (in percent of end-period GDP)
  - Change in total assets (FDI at current cost): 20.0 19.3 39.3 46.9
  - Change in total liabilities (FDI at current cost): 15.0 31.3 54.0 52.0
  - Change in IIP (FDI at current cost): 5.0 -12.0 -14.7 -5.1
  - Change in total assets (FDI at market value): 23.8 44.1 53.7
  - Change in total liabilities (FDI at market value): 34.6 62.7 52.6
  - Change in IIP (FDI at market value): -10.9 -18.6 1.1
  - Total financial outflows: 15.0 13.3 33.9 22.7
  - Total financial inflows: 12.5 27.2 52.1 46.7
  - Financial account: -2.5 13.9 18.2 24.0
  - Gap: assets (FDI current cost): 5.0 6.0 5.4 4.2
  - Gap liabilities (FDI current cost): 2.5 4.1 1.8 5.3
  - Net Gap (FDI current cost): 2.6 1.9 3.5 18.9
  - Gap assets (FDI market value): 10.4 10.2 31.0
  - Gap liabilities (FDI market value): 7.4 10.6 5.9
  - Net Gap (FDI market value): 3.0 -0.4 25.1
  - Note: Authors’ calculations based on BEA data.

- Table 2. Price and exchange rate valuation effects, 1983-2006 (in percent of end-period GDP)
  - 1983-92 | 1993-2001 | 2002-2006
  - Valuation BEA (assets, FDI at current cost): 1.8 18.1
  - Valuation BEA (liabilities, FDI at current cost): 6.0 5.6
  - Valuation BEA (net, FDI at current cost): -4.2 12.5
  - Valuation BEA (assets, FDI at market value): 6.9 25.5
  - Valuation BEA (liabilities, FDI at market value): 12.4 5.9
  - Valuation BEA (net, FDI at market value): -5.5 19.5
  - Valuation LMF (assets, FDI at current cost): 1.1 2.0 17.1
  - Valuation LMF (liabilities, FDI at current cost): 4.2 6.1 5.0
  - Valuation LMF (net, FDI at current cost): -3.1 -4.1 12.1
  - Valuation LMF (liabilities, FDI at market value): 5.5 5.8 25.0
  - Valuation LMF (net, FDI at market value): 7.1 12.3 5.8
  - Note: Top half reports BEA data on aggregate contribution of valuation effects (not available before 1989); bottom half reports results from implementing the LMF method described in section 2.

- Table 3. The Importance of Residual Adjustments, 1983-2006 (in percent of end-period GDP)
  - 1983-92 | 1993-2001 | 2002-2006
  - Residual BEA (assets, FDI at current cost): 3.6 15.5
  - Residual BEA (liabilities, FDI at current cost): -4.1 8.4
  - Residual BEA (net, FDI at current cost): 7.7 7.1
  - Residual BEA (assets, FDI at market value): 3.3 14.9
  - Residual BEA (liabilities, FDI at market value): -1.8 8.7
  - Residual BEA (net, FDI at market value): 5.1 6.2
  - Residual LMF (assets, FDI at current cost): 4.8 3.4 16.4
  - Residual LMF (liabilities, FDI at current cost): -0.1 -4.3 8.9
  - Residual LMF (net, FDI at current cost): 5.0 7.6 7.5
  - Residual LMF (assets, FDI at market value): 4.9 4.4 15.3
  - Residual LMF (liabilities, FDI at market value): 0.3 -1.7 8.8
  - Residual LMF (net, FDI at market value): 4.7 6.1 6.5
  - Note: Authors’ calculations. Top half reports BEA data on aggregate contribution of residual term (not available before 1989); bottom half reports results from implementing the LMF method described in section 2. The residual for assets and liabilities is particularly high in 2005 because the BEA started reporting asset and liability positions in derivatives that year.

- Table 4. Portfolio Assets and Liabilities: Stock-Flow Reconciliation (in percent of end-of-period GDP)
  - Portfolio Debt (1983-1992 | 1993-2001 | 2002-2006)
    - Change in Assets: 2.3 3.5 4.7
    - Change in Liabilities: 10.2 17.3 22.0
    - Change in Net Position: -8.0 -13.8 -17.3
    - Cumulative Financial Outflows: 1.4 3.2 2.5
    - Cumulative Financial Inflows: 9.9 19.2 24.3
    - Cumulative Net Flows: -8.5 -16.0 -21.9
    - Valuation (Assets): 0.2 -0.6 0.5
    - Valuation (Liabilities): 0.5 0.4 0.0
    - Valuation (Net): -0.3 -1.0 0.5
    - Residual (Assets): 0.7 0.9 1.8
    - Residual (Liabilities): -0.1 -2.3 -2.3
    - Residual (Net): 0.8 3.2 4.1
  - Portfolio Equity (1983-1992 | 1993-2001 | 2002-2006)
    - Change in Assets: 4.7 12.8 19.9
    - Change in Liabilities: 3.8 12.3 9.1
    - Change in Net Position: 0.9 0.5 10.8
    - Cumulative Financial Outflows: 1.5 7.4 3.8
    - Cumulative Financial Inflows: 0.5 5.8 2.9
    - Cumulative Net Flows: 1.0 1.6 0.9
    - Valuation (Assets): 1.1 3.3 13.5
    - Valuation (Liabilities): 3.3 5.7 4.2
    - Valuation (Net): -2.3 -2.5 9.4
    - Residual (Assets): 2.1 2.2 2.6
    - Residual (Liabilities): -0.1 0.8 2.0
    - Residual (Net): 2.2 1.4 0.6
  - Note: residual is calculated as change in assets (liabilities) minus cumulative financial outflows (inflows) minus valuation. Source: authors’ calculations based on IMF and BEA data.

- Table 5. Foreign Direct Investment: Stock-Flow Reconciliation (in percent of end-period GDP)
  - Current Cost (1983-1992 | 1993-2001 | 2002-2006)
    - Change in Assets: 4.6 10.2 8.8
    - Change in Liabilities: 5.6 9.7 4.4
    - Change in Net Position: -1.0 0.5 4.4
    - Cumulative Financial Outflows: 4.7 11.1 6.1
    - Cumulative Financial Inflows: 5.8 12.9 4.4
    - Cumulative Net Flows: -1.1 -1.7 1.7
    - Valuation (Assets): 0.1 -0.2 1.8
    - Valuation (Liabilities): 0.4 0.1 0.5
    - Valuation (Net): -0.3 -0.3 1.2
    - Residual (Assets): -0.2 -0.7 0.9
    - Residual (Liabilities): -0.6 -3.3 -0.5
    - Residual (Net): 0.3 2.6 1.4
  - Market Value (1983-1992 | 1993-2001 | 2002-2006)
    - Change in Assets: 9.0 15.0 15.6
    - Change in Liabilities: 8.9 18.4 5.0
    - Change in Net Position: 0.1 -3.4 10.6
    - Cumulative Financial Outflows: 4.7 11.1 6.1
    - Cumulative Financial Inflows: 10.3 12.9 4.4
    - Cumulative Net Flows: -5.7 -1.7 1.7
    - Valuation (Assets): 4.5 3.6 9.7
    - Valuation (Liabilities): 3.3 6.3 1.3
    - Valuation (Net): 1.2 -2.7 8.4
    - Residual (Assets): -0.1 0.2 -0.2
    - Residual (Liabilities): -0.2 -0.7 -0.7
    - Residual (Net): 0.0 1.0 0.5
  - Note: residual is calculated as change in assets (liabilities) minus cumulative financial outflows (inflows) minus valuation. Source: authors’ calculations based on IMF and BEA data.

- Table 6. Holdings of Banks and Non-Banks: Stock-Flow Reconciliation (in percent of end-period GDP)
  - 1983-1992 | 1993-2001 | 2002-2006
  - Change in Assets: 7.6 12.9 12.9
  - Change in Liabilities: 10.2 13.1 15.8
  - Change in Net Position: -2.6 -0.2 -2.9
  - Cumulative Financial Outflows: 5.4 12.1 10.6
  - Cumulative Financial Inflows: 9.6 12.8 14.4
  - Cumulative Net Flows: -4.3 -0.6 -3.8
  - Valuation (Assets): -0.1 -0.2 0.5
  - Valuation (Liabilities): 0.0 -0.1 0.4
  - Valuation (Net): -0.1 -0.1 0.2
  - Residual (Assets): 2.3 1.0 1.8
  - Residual (Liabilities): 0.6 0.5 1.1
  - Residual (Net): 1.7 0.5 0.7
  - Note: residual is calculated as change in assets (liabilities) minus cumulative financial outflows (inflows) minus valuation. Source: authors’ calculations based on IMF and BEA data.

- Table 7. Rates of Capital Gain
  - Periods: 1983-1992 | 1993-2001 | 2002-2006
  - Portfolio Equity Assets Full residual: 21.5 10.5 16.5
    - BEA/LMF: 9.4 7.2 13.4
  - Portfolio Equity Liabilities Full residual: 9.6 12.4 7.9
    - BEA/LMF: 9.8 10.9 4.4
  - Portfolio Debt Assets Full residual: 5.1 1.6 8.5
    - BEA/LMF: 1.7 -1.1 2.2
  - Portfolio Debt Liabilities Full residual: 0.8 -1.4 -1.5
    - BEA/LMF: -0.1 0.3 -0.4
  - FDI assets (current cost) Full residual: -0.3 -1.2 3.1
    - BEA/LMF: 0.2 -0.2 2.1
  - FDI liabilities (current cost) Full residual: 0.0 -3.7 -0.3
    - BEA/LMF: 0.5 0.1 0.7
  - Total Assets (FDI at current cost) Full residual: 2.4 2.3 7.3
    - BEA/LMF: 0.2 1.2 5.1
  - Total Liabilities (FDI at current cost) Full residual: 1.9 0.8 0.9
    - BEA/LMF: 1.5 1.6 1.2
  - Total Assets (FDI at market value) Full residual: 4.6 3.9 8.3
    - BEA/LMF: 2.5 3.0 6.4
  - Total Liabilities (FDI at market value) Full residual: 3.0 2.8 0.8
    - BEA/LMF: 2.5 3.2 1.0
  - Note: BEA/LMF capital gains are calculated as the ratio of the price and exchange rate valuation term for year t to the outstanding stock of the corresponding asset/liability at the end of year t-1. “Full residual” is the average rate of capital gain calculated by adding the entire residual term to the price and exchange rate valuation term.

- Table 8. Net Impact of Residual “Re-Allocation” on External Position, Capital Flows, and Valuation (in percent of end-period GDP)
  - 1983-1992 | 1993-2001 | 2002-2006
  - Portfolio Debt Net Flows: 0.8 3.2 4.0
    - Net Valuation: 0.0 0.0 0.1
  - Portfolio Equity Net Flows: 2.0 1.3 0.5
    - Net Valuation: 0.1 0.1 0.1
  - FDI at current cost Net Valuation: 0.3 2.6 1.4
  - FDI at market value Net Valuation: 0.0 1.0 0.5
  - Banks and Non-Banks Net Flows: 0.9 0.5 -0.1
    - Net Valuation: 0.0 0.0 0.0
    - Position: -0.9 -0.1 -0.8
  - Note: the table reports the difference between the revised cumulative capital flows, revised valuation effects, and revised changes in the external position on the one hand, and the official figures (reported in Tables 4-6) on the other hand.

*Source: _wp0828 - References (PDF chapter/section).*

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