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

Abstract

The US net foreign asset position has deteriorated sharply since 2007 and is currently negative 65 percent of US GDP. This deterioration primarily reflects changes in the relative values of large gross international equity positions, as opposed to net new borrowing. In particular, a sharp increase in equity prices that has been US-specific has inflated the value of US foreign liabilities. We develop an international macro finance model to interpret these trends, and we argue that the rise in equity prices in the United States likely reflects rising profitability of domestic firms rather than a substantial accumulation of unmeasured capital by those firms. Under that interpretation, the revaluation effects that have driven down the US net foreign asset position are associated with large, unanticipated transfers of US output to foreign investors.

A Portfolio Approach to Global Imbalances

“…While, by definition, it is not immediately clear what features of the data within-asset-class latent demand capture, the influence of latent demand is useful for generating additional hypotheses about drivers of capital flows. For example, a recent paper by Atkeson, Heathcote, and Perri (2021) argues that a rise in the profitability of U.S. firms is important for explaining trends in international equity positions and returns. Unfortunately, we do not observe measures of firm profitability across our issuer country sample.…”

A Comment on: “Walras–Bowley Lecture: Market Power and Wage Inequality” by Shubhdeep Deb, Jan Eeckhout, Aseem Patel, and Lawrence Warren

“…This literature is largely motivated by a novel set of empirical findings establishing that market concentration has increased and/or price markups have risen at the aggregate level. Heightened market power has already proved to be helpful in explaining a number of major macroeconomic trends in the United States, such as the decline in the labor share (Autor, Dorn, Katz, Patterson, and Van Reenen (2020)), the fall in business dynamism and innovation rate (Akcigit and Ates (2019)), the investment slowdown (Gutiérrez and Philippon (2017)), and the deteriorating net foreign asset position (Atkeson, Heathcote, and Perri (2022)).…”

Essays in International Finance

“…With higher levels of ERU, US investors may perceive the foreign markets as riskier and rebalance their portfolios to invest in the high returns of the domestic economy. The change in the yield and returns will generate a retrenchment in outflows, contracting even further the NFA deficit, as noted in Atkeson, Heathcote, and Perri (2022).…”

“…Posterior to it, the inflows grew more than the outflows, worsening the position. This is due to the loss of position in the international markets and the growth of US residents' demand for domestic assets, contradicting the privilege earned before, as mentioned by Atkeson et al (2022).…”

“…An explicit limitation of the model is that as the data is aggregated in terms of flows, they do not separate the effects of valuations and lending, as in Rey (2007, 2014) and Atkeson et al (2022). Although the analysis in an endogenous model allows us to see the dynamic response and uncover the persistence of shocks, a model for the heterogeneous response of a different type of investors, in the light of the , may further explain the channel of exchange rate fluctuations and shocks on portfolio rebalancing.…”