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Understanding US Net International Investment Position (NIIP) Dynamics

Explore the determinants of the US current account deficit and its impact on net external liabilities through trade flows and capital flows. Examine factors driving global imbalances, empirical results, and implications for the US economy.

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Understanding US Net International Investment Position (NIIP) Dynamics

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  1. Topic 1: Current account determination

  2. Balance of payments accounting • FRBNY article, June 2004 • BEA international statistics (www.bea.gov) • FRB Bulletin, May 2003 • Any intermediate macroeconomics textbook

  3. Net external liabilities • Current account deficits cumulate to net external liabilities • See www.bea.gov/bea/newsrel/intinvnewsrelease.htm • Focus on gross and net positions

  4. Net International Investment Position of the United States at Year end, 1989 – 2007 • See: http://www.bea.gov/international/xls/intinv07_t2.xls

  5. U.S. NIIP 2007 • NIIP at year end: about -$2.5 trillion (with FDI at current cost) • US-owned assets abroad $17.6 trillion • Foreign securities $6.6 trillion • US FDI abroad $3.93 trillion • Bank claims $3.8 trillion • Foreign-owned assets in US: $20.1 trillion

  6. Revaluation effects • Price changes: Greater share of FDI and portfolio equities in US assets than in US liabilities • Exchange rate changes: US liabilities largely denominated/priced in dollars, while US assets mostly denominated in foreign currency • Net liabilities decline when dollar depreciates

  7. Exchange rate changes • About two-thirds of US assets denominated in foreign currency • 10 percent depreciation in dollar $1200 billion  dollar value of gross US assets • Equivalent to roughly 7 percent of GDP • Lowers net payments on NIIP by 0.28 percent of GDP (.04  7%)

  8. Factors driving global imbalances • Two main views • “Trade-flows” versus “Capital-flows” view • Does the trade flows drive capital flows or vice-versa?

  9. Trade-flows view • Elasticities approach to trade • See: Hooper, Johnson, and Marquez (1998), Chinn (2005) • Idea: Relate trade flows to relative prices and importer income • Income: GDP or domestic demand • Relative prices: real trade-weighted (effective) exchange rate

  10. Trade equations • All variables in logs Xt = Y*t + 1Rt-1 + 2Rt-2 Mt = Yt + 1Rt-1 + 2Rt-2 • where: • X = real exports • M = real (non-oil) imports • Y = Domestic income; Y*= Foreign income • R = Real effective exchange rate

  11. Source: Chinn 2005

  12. Empirical results for the US • Good statistical fit •  >  > 0 • Houthakker-Magee asymmetry • Implication: with constant prices and equal U.S. and foreign income growth, U.S. trade deficit widens • ’s and ’s small • In part reflecting incomplete pass-through

  13. U.S. trade deficit • U.S. economy has been outperformed major trading partners 1997-2006 • Real dollar appreciated sharply from 1996 to 2001; depreciated since 2002 • Gap between imports and exports now so large that a marked acceleration in exports is needed to close trade deficit

  14. U.S. trade deficit • Partial equilibrium: trade deficit drives financial flows • General equilibrium: if ex-ante trade and financial flows differ, then the real exchange rate adjusts to equate the ex-post flows

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