A Portfolio Approach to Global Imbalances

Abstract

Recent decades are characterized by large imbalances in the U.S. net foreign asset (NFA) position. Adopting a portfolio-based approach, we estimate demand curves for international debt and equity markets at the country level, and use the estimated demand system to quantitatively attribute the long-run deterioration of the U.S. NFA position. Our decomposition shows that underlying a seemingly simple trend in global imbalances lie opposing forces related to investor savings behavior, official holdings, and investor demand shifts. The standard narratives of the global savings glut and changes in official holdings contribute to global imbalances by decreasing the U.S. NFA position from -10% to -94% of 2002 GDP, whereas shifts in investor demand reverse this trend by 62% of 2002 GDP. Finally, we use our demand system to quantify a key feature of the U.S. exorbitant privilege: global demand for U.S. debt is substantially more inelastic than for any other country. Thus, U.S. issuers can borrow much larger quantities of debt, at lower rates, when compared to other countries.