Globalization and the Geography of Capital Flows

Abstract

In this note, we document the large and growing distortions in official capital flows and investment statistics as a result of globalization. We provide a series of stylized facts about the extent and causes of these distortions, and also include data files containing U.S. portfolio holdings restated on a nationality basis to reflect the true exposures of U.S. investors.

Capital flow data—A guide for empirical analysis and real‐time tracking

“…Recent research finds that two important drivers of the growing disconnect between legal residence and economic exposure are capital market access and tax considerations (Bertaut et al, 2019;Lane & Milesi-Ferretti, 2018). Common examples of issues that are not appropriately captured in the residency-based BoP framework include:…”

“…2. Corporate tax optimization: Foreign direct investment to tax havens is driven by tax optimization strategies of multinational corporations (Bertaut et al, 2019;Coppola et al, 2020;Damgaard et al, 2019). 3.…”

“…4. Portfolio allocation via investment funds: The assets of investment funds are attributed to the country where the fund is registered (Bertaut et al, 2019;IMF, 2014). Moreover, under standard BoP accounting principles the holdings of investment fund shares are classified as equity investments (even for bond funds, for example).…”

The Geography of Capital Allocation in the Euro Area

“…We use a version of their remapping algorithm. Avdjiev et al (2016) pointed out the growing discrepancies of residency data with respect to the true underlying capital allocation, Fonseca et al (2022) and Aminadav and Papaioannou (2020) analyze global corporate control chains, Bertaut et al (2019) provide a restatement by nationality for US investors, and Damgaard et al (2019) focus on FDI and point out the growing role of Luxembourg and Ireland in intermediating FDI. 5 Maggiori, Neiman and Schreger (2020) establish home currency bias for ten developed countries and prove a causal relationship using within-firm variation in bonds issued in different currencies, but again consider the Euro Area as a single block of investors.…”

The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States

“…15 One final data issue concerns the measurement of the size of the gross international claims shown in Figure 3. As discussed in Bertaut, Bressler, and Curcuru (2019), measurement of financial claims on a residence basis, as in the BEA's Integrated Macroeconomic Accounts, likely overstates the extent of gross international financial claims on a nationality basis. These authors analyze the gross measures of US claims on the rest of the world as a case study of this discrepancy between reporting on a residence and nationality basis and point to three possible distortions affecting measures of gross claims by US residents on foreigners.…”