CFCM 19/06: Net foreign assets and current account balances

Summary

Theory predicts a negative long-run equilibrium relationship between net foreign assets and net exports (the trade balance plus net transfers).  In a large sample of countries back to 1971, the data are found to be consistent with this provided that the short-run dynamics are allowed to vary across countries.  By contrast, the correlation between net foreign assets and net exports in a given year tends to be positive in most years. The correlation between net foreign assets and the current account balance shows a similar pattern: negative in time series but positive in cross-section.  Shocks to relative prices and cycles in international lending prevent the world from settling on an equilibrium for any length of time.

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Authors

Michael Bleaney and Mo Tian

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