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Working Paper
Cross-border returns differentials
Were the U.S. to persistently earn substantially more on its foreign investments ("U.S. claims") than foreigners earn on their U.S. investments ("U.S. liabilities"), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, using a monthly dataset on the foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors, we find that the returns differential for portfolio securities is near zero, far smaller than previously reported. Examining all U.S. claims and liabilities ...
Working Paper
Cross-border returns differentials
Were the U.S. to persistently earn substantially more on its foreign investments ("U.S. claims") than foreigners earn on their U.S. investments ("U.S. liabilities"), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, we find that the returns differential of U.S. claims over U.S. liabilities is far smaller than previously reported and, importantly, is near zero for portfolio equity and debt securities. ; > For portfolio securities, we confirm our finding using a separate dataset on the actual foreign equity and bond ...
Working Paper
International Spillovers of Monetary Policy : Conventional Policy vs. Quantitative Easing
This paper evaluates the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies. We employ a novel approach to compare the international spillovers of conventional and balance sheet policies undertaken by the Federal Reserve. In principle, conventional monetary policy affects bond yields and financial conditions by affecting the expected path of short rates, while balance-sheet policy is believed act through the term premium. To distinguish the effects of these two types of policies we use a term structure model to decompose ...
Discussion Paper
The International Role of the U.S. Dollar
For most of the last century, the preeminent role of the U.S. dollar in the global economy has been supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, and strong property rights and the rule of law. As a result, the depth and liquidity of U.S. financial markets is unmatched, and there is a large supply of extremely safe dollar-denominated assets.
Discussion Paper
Non-Financial Corporate Credit and Recessions
The global financial crisis of 2008-09 (GFC) followed an extended period of growth in non-financial corporate (NFC) sector debt. NFC corporate debt resumed its climb a few years after the GFC, and the pace of growth picked up in 2020, as firms took on debt to cover revenue lost during the pandemic or to build up precautionary liquidity buffers.
Working Paper
The return on U.S. direct investment at home and abroad
A longstanding puzzle is that the United States is a net borrower from the rest of the world, yet continues to receive income on its external position. A large difference between the yields on direct investment at home and abroad is responsible and this paper examines potential explanations for this differential. We find that most of the differential disappears after one adjusts for the U.S. taxes owed by the parent on foreign earnings, the sovereign risk and sunk costs associated with investing abroad, and the age of foreign direct investment in the U.S.. Taken together, our results suggest ...
Working Paper
Current account sustainability and relative reliability
The sustainability of the large and persistent U.S. current account deficits is one of the biggest issues currently being confronted by international macroeconomists. Some very plausible theories suggest that the substantial global imbalances can continue in a benign manner, other equally plausible theories predict a disorderly resolution, and in general it is very difficult to discern between competing theories. To inform the debates, we view competing theories through the perspective of the relative reliability of the data the theories rely on. Our analysis of the dark matter theory is ...
Discussion Paper
The Sensitivity of the U.S. Dollar Exchange Rate to Changes in Monetary Policy Expectations
This note summarizes recent work in the International Finance Division of the Federal Reserve Board on the relationship between movements in exchange rates and monetary policy expectations.
Working Paper
U.S. international equity investment and past prospective returns
Counter to extant stylized facts, using newly available data on country allocations in U.S. investors' foreign equity portfolios we find that (i) U.S. investors do not exhibit returns-chasing behavior, but, consistent with partial portfolio rebalancing, tend to sell past winners; and (ii) U.S. investors increase portfolio weights on a country's equity market just prior to its strong performance, behavior inconsistent with an informational disadvantage. Over the past two decades, U.S. investors' foreign equity portfolios outperformed a value-weighted foreign benchmark by 160 basis points per ...
Working Paper
Uncovered Equity Parity and Rebalancing in International Portfolios
Portfolio rebalancing is a key driver of the Uncovered Equity Parity (UEP) condition. According to UEP, when foreign equity holdings outperform domestic holdings, domestic investors are exposed to higher exchange rate exposure and hence repatriate some of the foreign equity to decrease their exchange rate risk. By doing so, foreign currency is sold, leading to foreign currency depreciation. We examine the relationship between U.S. investors' portfolio reallocations and returns and find some evidence consistent with UEP: Portfolio shifts are related to past returns in the underlying equity ...