On the dynamics of the investment income balance

Thomas Knetsch and Arne Nagengast

No 21/2016, Discussion Papers from Deutsche Bundesbank

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.

Keywords: Investment income balance; Return differential; Exorbitant privilege; International risk sharing (search for similar items in EconPapers)
JEL-codes: E50 F36 F45 G15 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Penny wise and pound foolish? On the income from Germany’s foreign investments (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:212016

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