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Countries’ external balance sheets, dynamics of international adjustment and capital flows

Objective

This project develops new theories and constructs new datasets to understand the determinants of net and gross foreign assets, the trade balance and the exchange rate. It also quantifies their respective roles in the dynamics of countries’ external deficits. In previous work, I constructed a database of US foreign assets and liabilities to analyse the sustainability of US current account deficits. I propose to build on this work along four related lines. First, I will generalize the analysis to other countries, contrasting the external balance sheets of large financially developed economies (US, UK) with those of small open economies (Canada, Australia). I will compare the historical role of the UK as a world banker to the current position of the US in the international monetary system. I will construct disaggregated databases of foreign assets at market value for these countries. Second, I will develop new theories of portfolio investment where international wealth transfers and predictable excess returns play a key role. These elements are rarely incorporated in open economy models but are essential for realism. I will develop and calibrate a new class of portfolio balance models compatible with the macroeconomic stylized facts on capital flows to study how countries’ capacity to accumulate foreign debt depends on changes in portfolio preferences (e.g. erosion of home bias). Third, I will use a disaggregated database of international investment positions of institutional investors to test for portfolio rebalancing at the microeconomic level. This exceptional database should also provide insights on the international propagation of financial crises. I will link the magnitude of price drops of given equities in crisis times to the institutional and geographical characteristics of their holders. Fourth, I will extend the methodology developed to analyze external adjustment to the issue of fiscal adjustment and twin deficits.

Field of science

  • /social sciences/economics and business/business and management/commerce
  • /natural sciences/computer and information sciences/databases
  • /social sciences/other social sciences/social sciences interdisciplinary/sustainable development

Call for proposal

ERC-2007-StG
See other projects for this call

Funding Scheme

ERC-SG - ERC Starting Grant

Host institution

LONDON BUSINESS SCHOOL
Address
Regent S Park
NW1 4SA London
United Kingdom
Activity type
Higher or Secondary Education Establishments
EU contribution
€ 1 340 000
Principal investigator
Helene Rey (Prof.)
Administrative Contact
Geoff Bailey (Mr.)

Beneficiaries (1)

LONDON BUSINESS SCHOOL
United Kingdom
EU contribution
€ 1 340 000
Address
Regent S Park
NW1 4SA London
Activity type
Higher or Secondary Education Establishments
Principal investigator
Helene Rey (Prof.)
Administrative Contact
Geoff Bailey (Mr.)