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On the dynamics of the investment income balance

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  • Knetsch, Thomas A.
  • Nagengast, Arne J.

Abstract

While the positive return differential of the United States has attracted a lot of attention in the literature, the factors underlying the dynamics of the investment income balance have so far not been systematically investigated. Here, we propose a novel decomposition framework that accounts for the changes in net investment income. This allows us to disentangle contributions of changes in yield level and yield spread from those of changes in stocks as well as composition and portfolio effects. The analysis contributes conceptually to the question of how investment income might facilitate international risk sharing. We apply our decomposition framework to a rich German dataset spanning 11 different investment classes and provide a forensic account of the increase in the German investment income balance between 1999 and 2014. Focusing exclusively on the aggregate development of external assets and liabilities falls short of explaining the growth in German net investment income and around 40% of the increase is explained by changes in yields. Furthermore, our results highlight the importance of considering the composition of external assets and liabilities as well as portfolio changes in order to understand the dynamics of the investment income balance.

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  • Knetsch, Thomas A. & Nagengast, Arne J., 2016. "On the dynamics of the investment income balance," Discussion Papers 21/2016, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:212016
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    8. Duncan van Limbergen, 2020. "Revisiting the income balance. What makes EU tax havens different?," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Bridging measurement challenges and analytical needs of external statistics: evolution or revolution?, volume 52, Bank for International Settlements.
    9. Joyce, Joseph, 2021. "The International Distribution of FDI Income And Its Impact on Income Inequality," MPRA Paper 106448, University Library of Munich, Germany.
    10. Thomas A. Knetsch & Arne J. Nagengast, 2017. "Penny wise and pound foolish? On the income from Germany’s foreign investments," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(4), pages 753-778, November.
    11. Bursian, Dirk & Goldbach, Stefan & Jochem, Axel & Nagengast, Arne & Schön, Matthias & Stähler, Nikolai & Vetlov, Igor, 2020. "A model-based analysis of the German current account surplus," Technical Papers 03/2020, Deutsche Bundesbank.
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    Keywords

    Investment income balance; Return differential; Exorbitant privilege; International risk sharing;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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