With the rapid growth of countries' foreign asset and liability positions over the last two decades, financial returns on those positions ('NFA returns') have become material drivers of current accounts and net stock positions. This paper documents the relative importance of NFA return versus trade channels in driving NFA dynamics, for a sample of 52 economies over 1990-2015. While persistent trade imbalances have been a strong force leading to diverging NFA positions, NFA returns have played an important stabilizing role, mitigating NFA divergence. The stabilizing role of NFA returns primarily reflects the response of asset prices, rather than yield differentials or exchange rates. There is also evidence of heterogeneity in the speed of NFA adjustment, with emerging market economies adjusting more rapidly than advanced economies, and reserve-currency countries adjusting more slowly than others. The paper also documents the role of NFA returns as insurance against domestic and global income shocks, with a focus on reserve-currency countries.

With the rapid growth of countries' foreign asset and liability positions over the last two decades, financial returns on those positions ('NFA returns') have become material drivers of current accounts and net stock positions. This paper documents the relative importance of NFA return versus trade channels in driving NFA dynamics, for a sample of 52 economies over 1990-2015. While persistent trade imbalances have been a strong force leading to diverging NFA positions, NFA returns have played an important stabilizing role, mitigating NFA divergence. The stabilizing role of NFA returns primarily reflects the response of asset prices, rather than yield differentials or exchange rates. There is also evidence of heterogeneity in the speed of NFA adjustment, with emerging market economies adjusting more rapidly than advanced economies, and reserve-currency countries adjusting more slowly than others. The paper also documents the role of NFA returns as insurance against domestic and global income shocks, with a focus on reserve-currency countries.

This paper highlights the increased dispersion in net external positions in recent years, particularly among industrial countries. It provides a simple accounting framework that disentangles the factors driving the accumulation of external assets and liabilities (such as trade imbalances, investment income flows, and capital gains) for major external creditors and debtors. It also examines the factors driving the foreign asset portfolio of international investors, with a special focus on the weight of U.S. liabilities in the rest of the world's stock of external assets. Finally, it relates the empirical evidence to the current debate about the roles of portfolio balance effects and exchange rate adjustment in shaping the external adjustment process.

The composition of Japan’s current account balance has changed over time, with an increasing income balance primarily reflecting a growing net foreign asset position and higher corporate saving. A comparison of Japan’s income balance with peer countries highlights: (i) relatively high yields on FDI assets, and (ii) very low FDI liabilities in Japan. Panel estimation is used to derive separate exchange rate elasticities for income credit and debit, with novel accounting that disentangles the mechanical from the economic response to exchange rate fluctuations. Despite the changing composition of Japan’s current account balance, its response to exchange rate movements still operates mostly through the traditional trade channel, with a small but reinforcing contribution from the income balance.

Contents : Wage Inequality and Regional Unemployment Persistence: U.S. vs. Europe, Guiseppe BErtola and Andreas Ichino. Capital Utilization and Returns to Scale, Craig Burnside, Martin Eichenbaum, and Sergio Rebelo. Banks and Derivatives, Gary Gorton and Richard Rosen. Exchange-Rate-Based Stabilizations: Theory and Evidence, Sergio Rebelo and Carlos Vegh. Inflation Indicators and Inflation Policy, Stephen Cecchetti. Recent Central Bank Reforms and the Role of Price Stability as the Sole Objective of Monetary Policy, Carl Walsh. Is Central Bank Independence (and Low Inflation) the Result of Effective Financial Opposition to Inflation?, Adam Posen. The Unending Quest for Monetary Salvation, Stanley Fischer.

This Selected Issues paper assesses the relationship between demographic trends and housing prices in Japan. Among various issues in the context of regional disparities, the paper focus on regional differences in population dynamics to try and understand to what extent demographic trends have influenced housing market prices in Japan in the past twenty years. Large cities, notably the Greater Tokyo area, are experiencing net migration inflows, while other regions are experiencing net migration outflows. Due to the durability of housing compared to other forms of investment, the magnitude of house price declines associated with population losses is larger than that of house price increases associated with population gains. These model-based predictions are likely to underestimate the actual fall in house prices associated with future population losses, as expectations of lower housing prices in the future could trigger more population outflows and disposal of houses, especially in rural areas. The paper suggests policy measures to help close regional disparities and avoid potential over-investment by taking account of demographic trends for housing supply.

Although Europe in the aggregate is a not a major contributor to global current account imbalances, its trade and financial linkages with the rest of the world mean that it will still be affected by a shift in the current configuration of external deficits and surpluses. We assess the macroeconomic impact on Europe of global current account adjustment under alternative scenarios, emphasizing both trade and financial channels. Finally, we consider heterogeneous exposure across individual European economies to external adjustment shocks.