External Sustainability : A Stock Equilibrium Perspective
The authors consider external sustainability from the perspective of equilibrium in net foreign asset positions. Under their approach, an external situation is sustainable if it is consistent with international and domestic investors' achievin...
Main Authors: | , , |
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Format: | Policy Research Working Paper |
Language: | English en_US |
Published: |
World Bank, Washington, DC
2014
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Subjects: | |
Online Access: | http://documents.worldbank.org/curated/en/2000/01/438956/external-sustainability-stock-equilibrium-perspective http://hdl.handle.net/10986/19857 |
Summary: | The authors consider external
sustainability from the perspective of equilibrium in net
foreign asset positions. Under their approach, an external
situation is sustainable if it is consistent with
international and domestic investors' achieving their
desired portfolio allocation across countries. They develop
a reduced-form model of net foreign asset positions whose
long-run equilibrium condition expresses the ratio of net
foreign assets to the total wealth of domestic residents as
a negative function of investment returns in the country
relative to the rest of the world, a positive function of
investment risk, and an inverse function of the ratio of
foreign-owned to domestically owned wealth. To estimate this
equilibrium condition, the authors use a newly constructed
data set of foreign asset and liability stocks for a large
group of industrial and developing countries, from the 1960s
to the present. They also develop summary measures of
country returns and risks. Their econometric methodology is
an application of the Pooled Mean Group estimator recently
developed by Pesaran, Shin, and Smith (1999), which allows
for unrestricted cross-country heterogeneity in short-term
dynamics while imposing a common long-run specification. The
estimation results lend considerable support to the model,
especially when applied to countries with low capital
controls or high or upper-middle income. The results for
countries with high capital controls and, especially,
lower-income countries are less supportive of the stock
equilibrium model. As a by-product of the model's
estimation, the authors obtain estimates of the long-run
equilibrium ratios of net foreign assets to wealth,
conditional on the observed values of the country's
relative returns, risks, and wealth. Then, for a selected
group of industrial and developing countries, they evaluate
the extent to which actual ratios diverge from their
long-run counterparts - and hence the sustainability of
current net foreign asset positions. |
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