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From World Banker to World Venture Capitalist: The US External Adjustment and the Exorbitant Privilege
with Helene Rey (Princeton University)
A pdf version of the paper is available (v.08/05/05).
This paper is a revised version of "US External Adjustment: The Exorbitant Privilege" posted February 2005.
Here is the abstract:
Does the center country of the International Monetary System enjoy an “exorbitant privilege”
that significantly weakens its external constraint as has been asserted in some European quarters?
Using a newly constructed dataset, we perform a detailed analysis of the historical evolution of
US external assets and liabilities at market value since 1952. We find strong evidence of a sizeable
excess return of gross assets over gross liabilities. Interestingly, this excess return has increased
after the collapse of the Bretton Woods fixed exchange rate system. It is mainly due to a “return
discount”: within each class of assets, the total return (yields and capital gains) that the US has
to pay to foreigners is smaller than the total return the US gets on its foreign assets. We also
find evidence of a “composition effect”: the US tends to borrow short and lend long. As financial
globalization accelerated its pace, the US transformed itself from a World Banker into a World
Venture Capitalist, investing greater amounts in high yield assets such as equity and FDI. We use
these findings to cast some light on the sustainability of the current global imbalances.
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