Working paper

Returns on foreign assets and liabilities: exorbitant privileges and stabilising adjustments

Large stock of foreign assets and liabilities could foster international risk diversification. US, British and Japanese investors earn high yields on

Publishing date
29 November 2017

Financial globalisation has led to large increases in foreign assets and liabilities in recent decades, increasing the scope for valuation changes that are potentially greater than trade or financial flows.

We confirm that the United States enjoys an ‘exorbitant privilege’ on flow income from foreign assets, which is primarily related to foreign direct investment (FDI). The geographical allocation of FDI assets explains only a small part of the US yield advantage. The key reason is that US, and also British and Japanese, investors were able to outperform the average yield earned in the countries of their FDI destinations, while most continental European investors earn the average. Further research should explore if large FDI investment in ‘tax optimisation’ countries, the improper consideration of intellectual property, or financial sophistication contributed to these high yields.

For several countries, valuation changes were larger than current account and financial transactions, highlighting the importance of such changes. In the European Union, the generally negative international investment positions of a number of central and southern European countries were greatly supported by EU transfers.

Valuation changes on net foreign assets do not look random and played an important role in the sustainability of international investment positions before and after the 2008 crisis. Countries with negative net international investment positions tend to have positive revaluation gains, while countries with large net foreign assets tend to suffer from revaluation losses. Large net foreign asset holders including China, Saudi Arabia, Switzerland, Japan and Germany, suffered significant losses in 2007-16, helping the sustainability of the negative positions of other countries. Risk sharing was also fostered by losses suffered by the US since 2007. There is no uniform tendency in relation to the asset classes from which these losses arose. Future research should aim to better understand the drivers of these valuation changes.

About the authors

  • Zsolt Darvas

    Zsolt Darvas is a Senior Fellow at Bruegel and part-time Senior Research Fellow at the Corvinus University of Budapest. He joined Bruegel in 2008 as a Visiting Fellow, and became a Research Fellow in 2009 and a Senior Fellow in 2013.

    From 2005 to 2008, he was the Research Advisor of the Argenta Financial Research Group in Budapest. Before that, he worked at the research unit of the Central Bank of Hungary (1994-2005) where he served as Deputy Head.

    Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics but also at other institutions since 1994. His research interests include macroeconomics, international economics, central banking and time series analysis.

  • Pia Hüttl

    Pia Hüttl is an Austrian citizen and joined Bruegel as an Affiliate Fellow in 2015. Her research interests include macroeconomics, financial economics and monetary policy as well as European political economy.

    Prior to this, Pia worked as Research Assistant for Bruegel, and as a Trainee in the Monetary Policy Division of the European Central Bank. Also, she worked as a Blue Book Stagiaire in the Monetary policy, Exchange rate policy of the euro area, ERM II and Euro adoption Unit in DG Ecfin of the European Commission.

    She holds a Bachelor's degree in European Economics and a Master's degree in International Economics from the University of Rome Tor Vergata. She also obtained a Master's degree in European Political Economy from the London School of Economics, with a thesis on Current Account imbalances in the Euro area and the role of financial integration.

    Pia is currently pursuing a PhD in Economics at the Humboldt University in Berlin.

    She is fluent in German, Italian and English, and has good notions of French.

    Declaration of interests 2015

    Declaration of interests 2016

    Declaration of interests 2017

Related content