The Wealth of Nations: Global imbalances and adjustments in a financially integrated world
07 / 2006 - 11 / 2010
An important advantage of international capital mobility is that a country s inhabitants can spread macro-economic consumption over time. Intermediate changes in savings patterns potentially allow smooth consumption patterns and intergenerational risksharing. Countries with ageing populations can save by investing abroad for some time, and subsequently start to spend when large parts of the population retire. As a prime example, the Netherlands has been a net saver in macro-economic sense during the past two decades, and has increased its foreign assets. Is has been assumed that eventually trade deficits - being financed by foreign assets - will appear. However, recent research has raised questions on the feasibility of the smoothing of consumption changes through international markets. Decreasing Dutch net foreign assets have turned into a liability around 1997. Countries with persistent deficits, tend to earn more on foreign assets than they pay on their foreign liabilities. The opposite is true for net savers. The project is aimed at the incorporation of valuation changes into the standard model, linking foreign assets and liabilities to the trade balance and the equilibrium real exchange rate. It takes risks in the standard model into account, comparing the returns on foreign liabilities and assets. It analyses macro risks and the use of specifically-aimed financial instruments, as well as the demographics of different countries and their pension systems. It will also try to explain differences in the development of gross foreign assets and liabilities, trade balances and exchange rate changes. Furthermore, it investigates possible long-term differences in assets and liabilities within and outside the EMU. A first empirical working paper will be presented next spring. The focus is on to what extent the geographic pattern of Dutch foreign assets and liabilities affects the results, and how this relates to developments in the bilateral exchange rate. Further theoretical and empirical research of the wider portfolio is expected next year.