Reducing Large Net Foreign Liabilities

37 Pages Posted: 14 Jun 2017

See all articles by Michael Fidora

Michael Fidora

European Central Bank (ECB)

Martin Schmitz

European Central Bank (ECB)

Céline Tcheng

Banque de France

Date Written: June 12, 2017

Abstract

In light of persistently large net foreign liability (NFL) positions in several euro area countries, we analyse 138 episodes of sizeable NFL reductions for a broad sample of advanced and emerging economies. We provide stylised facts on the channels through which NFLs were reduced and estimate factors which make episodes ‘stable’, i.e. sustained over the medium term. Our findings show that while GDP growth and valuation effects contribute most to NFL reductions overall, stable reduction episodes also require positive transaction effects (i.e. current account surpluses), in particular in advanced economies. Considering the different components of a country’s external balance sheet, we observe that reduction episodes were almost exclusively driven by a decline in gross external liabilities in emerging economies, while in advanced economies also gross external asset accumulation contributed significantly, in particular in stable episodes. Our econometric analysis shows that NFL reductions are more likely to be sustained if a country records strong average real GDP growth during an episode and exits the episode with a larger current account surplus. Moreover, we find evidence that nominal effective exchange rate depreciation during an episode is helpful for achieving episode stability in the short run, while IMF programmes and sovereign debt restructurings also contribute to longer term stability.

Keywords: Net Foreign Assets, External Imbalances, Stock Imbalances, External Adjustment, Valuation Effects

JEL Classification: F21, F32, F34

Suggested Citation

Fidora, Michael and Schmitz, Martin and Tcheng, Céline, Reducing Large Net Foreign Liabilities (June 12, 2017). ECB Working Paper No. 2074, Available at SSRN: https://ssrn.com/abstract=2985361 or http://dx.doi.org/10.2139/ssrn.2985361

Michael Fidora (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 5713 (Phone)

Martin Schmitz

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Céline Tcheng

Banque de France ( email )

Paris
France

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