The Stabilizing Role of Net Foreign Asset Returns

IMF Working Papers, April 6, 2018

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The Stabilizing Role of Net Foreign Asset Returns

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Bibliographic details

• Authors: Gustavo Adler, Daniel Garcia-Macia
• Published: April 6, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484349922.001

Main findings

• Financial returns on foreign asset and liability positions ("NFA returns") have become material drivers of current accounts and net stock positions with the rapid growth of countries' foreign asset and liability positions over the last two decades.
• For a sample of 52 economies over 1990-2015, persistent trade imbalances have been a strong force leading to diverging NFA positions, while NFA returns have played an important stabilizing role, mitigating NFA divergence.
• The stabilizing role of NFA returns primarily reflects the response of asset prices, rather than yield differentials or exchange rates.
• Heterogeneity in the speed of NFA adjustment:
  • Emerging market economies adjust more rapidly than advanced economies.
  • Reserve-currency countries adjust more slowly than others.
• NFA returns function as insurance against domestic and global income shocks, with special emphasis on reserve-currency countries.

Analytical emphasis and mechanisms

• NFA dynamics are driven by two channels emphasized in the paper:
  • Trade channels (persistent trade imbalances driving divergence in NFA positions).
  • Financial return channels (NFA returns mitigating divergence, mainly via asset price changes).
• Within financial return channels, the paper distinguishes between:
  • Asset price responses (primary stabilizing factor).
  • Yield differentials (less important for stabilization).
  • Exchange rate movements (less important for stabilization).

Scope and data

• Sample: 52 economies.
• Time period: 1990-2015.
• Pages: 33.
• Series: Working Paper No. 2018/079.
• Issue: 079.
• Volume: 2018.
• DOI: https://doi.org/10.5089/9781484349922.001.
• ISBN: 9781484349922.
• ISSN: 1018-5941.

Subjects and keywords (as provided)

• Subjects: Asset prices, Exchange rates, Financial institutions, Foreign exchange, Income shocks, Insurance, International trade, National accounts, Prices, Trade balance.
• Keywords: Asset prices, Exchange rates, Global, Income shocks, Insurance, international investment position, net foreign assets, NFA dynamics, NFA position, NFA return, return differential, Trade balance, valuation change, valuation changes, WP.

IMF Working Papers — "The Stabilizing Role of Net Foreign Asset Returns" by Gustavo Adler and Daniel Garcia-Macia, April 6, 2018.

Content in this bundle

• The Stabilizing Role of Net Foreign Asset Returns, WP/18/79, March 2018
  • The Stabilizing Role of Net Foreign Asset Returns, WP/18/79, March 2018 (Markdown version)
  • The Stabilizing Role of Net Foreign Asset Returns, WP/18/79, March 2018 (PDF)