International Investment Income: Patterns, Drivers, and Heterogeneous Sensitivities

Giovanni Donato () and Cédric Tille ()
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Giovanni Donato: Graduate Institute of International and Development Studies
Cédric Tille: Graduate Institute of International and Development Studies, and CEPR

IMF Economic Review, 2025, vol. 73, issue 2, No 4, 457-521

Abstract: Abstract While financial globalization significantly expanded cross-border holdings, this has not been mirrored in primary investment income flows until recently. We analyze the drivers of investment yields and link our estimates to countries’ balance sheets to get the impact on investment income flows. We find that exchange rates, interest rates, and macroeconomic conditions matter, with considerable variation across asset classes. For instance, a strong dollar reduces FDI yields, while higher US long-term rates raise yield on debt and banking positions. We combine our econometric results with the evolution of key drivers since 2021 and show how the recent surge in inflation and interest rates affected income flows. Advanced economies generally experienced worsening income balances, while emerging markets saw improvements, though with substantial variation within each group. Although the decline among advanced economies is larger for those with initial current account deficits, this is not the case in emerging economies.

JEL-codes: F32 F36 F40 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41308-025-00277-y

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