External Balance sheets of Nations

External Balance sheets of Nations

Also read my other related post.

Foundations of Balance Sheet Economics


From The role of external balance sheets in the financial crisis

Gross external balance sheets are important in explaining the incidence of the financial crisis across economies. Just as for banks, leverage of the national balance sheet was an indicator of subsequent vulnerability. Countries that also experienced strong domestic credit growth, in part fuelled by ‘savings glut’ net capital inflows, suffered particularly badly. And banks’ balance sheets were critical in the transmission mechanism: high gross external interbank debt — the ‘banking glut’ — and maturity and currency mismatches, contributed to foreign rollover risk.


From  Bilateral Financial Linkages and Global Imbalances: a View on The Eve of the Financial Crisis

During the last 15 years international financial integration has increased dramatically. This process was characterized in particular by two related trends: an explosion in the size of cross-border capital inflows and outflows, reflected in rapidly expanding stocks of external assets and liabilities; and the emergence of global imbalances, reflected in an increased dispersion in world current account positions and a sharp widening of global net debtor and creditor positions. With cross-border financial linkages becoming much stronger, measuring them accurately is essential to understand the impact and international transmission of shocks, as the global financial crisis has clearly shown. However, while research on causes and consequences of global imbalances and international financial integration has been extensive, and recent pioneering work by Kubelec and Sa (2010) has documented the increase in bilateral financial linkages among 18 advanced economies and emerging markets, we still lack a comprehensive global picture of bilateral net and gross positions across countries. This paper takes a first step towards filling that gap.

From The geographical composition of national external balance sheets: 1980–2005

Financial globalisation has been one of the most striking phenomena happening in the world economy in the past two decades. Until recently, very little was known about the size and composition of countries’ external nancial assets and liabilities. This gap was partly narrowed by the work of Lane and Milesi-Ferretti, which provides estimates of the total external nancial assets and liabilities of 145 countries, from 1970 to 2004. These data show that there has been a marked increase in the ratio of foreign assets and liabilities to GDP, particularly since the mid-1990s. This increase has been especially pronounced among industrial countries, where nancial integration has exceeded trade integration. However, very little is known about the geographical composition of assets and liabilities. This paper contributes to a better understanding of the geographical composition of countries’ external positions by constructing a data set of stocks of bilateral assets and liabilities for a group of 18 countries, covering the period from 1980 to 2005.

The data distinguish between four asset classes: foreign direct investment, portfolio equity, debt, and foreign exchange reserves. For the rst three asset classes, missing data are constructed using gravity models, which have been extensively applied to explain cross-border trade and have been increasingly used to explain nancial stocks and ows. These models explain bilateral assets by the geographical and historical proximity between the source and host countries, including variables such as distance, time difference, whether the source and host countries share a common border, a common language, or have colonial links. These models tend to have a large explanatory power, suggesting that nancial markets are not frictionless, but are segmented by information asymmetries and familiarity effects. For reserves, a two-step procedure is adopted. First, data on the currency composition are collected and then are translated into geographical composition.


Key Sources of Research:

Financial globalisation, external balance sheets and economic adjustment

By Chris Kubelec




Global imbalances and external adjustment after the crisis

Philip R. Lane

Gian Maria Milesi-Ferretti

This draft: May 15, 2014




The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004

Philip R. Lane and Gian Maria Milesi-Ferretti





Europe and Global Imbalances

Philip R. Lane and Gian Maria Milesi-Ferretti




A Global Perspective on External Positions

Philip R. Lane and Gian Maria Milesi-Ferretti



Capital Flows to Central and Eastern Europe

Philip R. Lane

Gian Maria Milesi-Ferretti



Cross-border portfolios: assets, liabilities, and non- flow adjustments

Stephanie E Curcuru,2 Charles P Thomas,2 Francis E Warnock



Why do Foreigners Invest in the United States?

Kristin J. Forbes





Kristin J. Forbes



Patterns of International Capital Flows and Their Implications for Economic Development

Eswar Prasad, Raghuram G. Rajan, and Arvind Subramanian



Financial Globalisation and the Crisis

Philip R. Lane

June 2012



The financial crisis and its international transmission: some tentative lessons 

Gian Maria Milesi-Ferretti

September 14, 2009



External liabilities and crises

Luis A.V. Catão , Gian Maria Milesi-Ferretti




International Investment Patterns

Philip R. Lane
Gian Maria Milesi-Ferretti




Where Did All the Borrowing Go?
A Forensic Analysis of the U.S. External Position

Prepared by Philip R. Lane and Gian Maria Milesi-Ferretti1

February 2008



An Elephant in the Room: The US External Balance Sheet and International Monetary Power


Iain Hardie

Sylvia Maxfield




THE EXTERNAL WEALTH OF NATIONS Measures of Foreign Assets and Liabilities For Industrial and Developing Countries

Philip Lane

Gian Maria Milesi-Ferretti

August 14, 2000



The role of external balance sheets in the financial crisis

Yaser Al-Saffar, Wolfgang Ridinger and Simon Whitaker




Domestic Credit Growth and International Capital Flows

Philip R. Lane and Peter McQuade





Alfredo Pistelli

Jorge Selaive

Rodrigo O. Valdés




External Balance Sheets as Countercyclical Crisis Buffers

Joseph Joyce




Bilateral Financial Linkages and Global Imbalances: a View on the Eve of the Financial Crisis

Gian Maria Milesi-Ferretti

Francesco Strobbe

Natalia Tamirisa

This Draft: May 13, 2011




Financial Globalization and Cross-Country Spillovers

Chris Kubelec  and Filipa Sa




The geographical composition of national external balance sheets: 1980–2005

Chris Kubelec and Filipa Sá

March 2010



U.S. Net International Investment Position



The International Balance Sheets of China and India

Philip R. Lane

Preliminary Draft. March 2006.





Low Interest Rates and International Capital Flows

Low Interest Rates and International Capital Flows


Mendoza and Quadrini had proposed in 2009 that Financial Globalization is one of the cause of Financial Contagion and crisis.

Ben Bernanke has proposed Savings Glut in the emerging market countries as the cause of depressed real interest rates in advanced economies.  Return to safe assets.

Larry Summers, since 2013, has proposed Secular Stagnation as a cause of depressed interest rates.  He says that the IS curve has shifted to the left.

Hyun Song Shin has proposed Banking Glut as the cause of low real interest rates.  Round Tripping of US dollars through European Banks has created depressed real interest rates in USA.

Junji Tokunaga and Gerald Epstein have proposed US Dollar based Global shadow Banking system as the cause of financial fragility.  Role of Offshore Financial Centers.

Stanley Fischer says that low productivity growth and demographic changes are also to be blamed.

We also need to look at changes in IIP (International Investment Positions) of USA over the years.  Impact of NAFTA and Trade with China also need to be studied.  What happens when a corporate borrows cheap money in USA and invests overseas lets say in China or Mexico?  What are the impacts on Real Interest rates?

Another perspective:  What is the impact of Declining Real Interest Rates on the Capital Flows?    Do declining Net Interest Margins of Banks influence capital flows?  Is the Causality other way round from Low Interest rates to Increase in Capital Flows?


Causes of Low Real Interest rates including capital in-flows:

  • Inequality
  • Demographics
  • Global Savings Glut
  • Global Banking Glut
  • Eurodollars In-flows
  • Weak Foreign Economic Growth
  • Low Investments
  • Increased Savings
  • Weak Demand ( Inverse Says Law)
  • Debt Overhang
  • Liquidity Trap
  • Supply Side effects


From The Age of Secular Stagnation

Other explanations for what is happening have been proposed, notably Kenneth Rogoff’s theory of a debt overhang, Robert Gordon [6]’s theory of supply-side headwinds, Ben Bernanke’s theory of a savings glut [7], and Paul Krugman’s theory of a liquidity trap. All of these have some validity, but the secular stagnation theory offers the most comprehensive account of the situation and the best basis for policy prescriptions. The good news is that although developments in China [8] and elsewhere raise the risks that global economic conditions will deteriorate, an expansionary fiscal policy by the U.S. government can help overcome the secular stagnation problem and get growth back on track.

From Financial Globalization, Financial Crises and Contagion


The global financial crisis that started with the meltdown of the U.S. sub- prime mortgage market in 2007 was preceded by a twenty-year period of substantial growth in debt and leverages, in an environment of increasing world financial integration, low real interest rates and growing U.S. external deficits. During this period of widening “global imbalances” we also observed large financial crises in emerging economies with cross-country contagion that in some cases did not appear to be motivated by fundamental forces. Some of these crises affected the capital markets of the industrial world (particularly the LTCM crisis in the aftermath of the 1998 Russian crash).

These events have generated a large body of research with well-established contributions. Until now, however, the study of global imbalances and the study of financial crises and contagion have remained somewhat separate subjects. In particular, the study of financial or currency crisis has mostly been focused on emerging economies in a small economy set-up. In contrast, this paper addresses the question of whether the ongoing global financial crisis and the process of financial globalization are related. In particular, we study two key issues. First, we study how financial globalization contributed to the buildup of very high leverages in some industrialized countries, especially the U.S. Second, we study how credit frictions can amplify the effects of credit shocks on asset prices and how these effects are transmitted across countries in a world that is financially integrated.

The motivation for this project derives from the evidence provided by Figure 1 showing that the U.S. credit boom was largely fueled by foreign lending.

The first panel of Figure 1 shows that the net debt-income ratio of the U.S. non financial sectors doubled between 1982 and 2008 (net credit market assets as a ratio of GDP of these sectors fell from -1 to about -2). A surge in net debt of this magnitude, which affected all three broad U.S. non financial sectors (households, non financial businesses, and the government), is unprecedented in the data available since 1946.

Starting in the mid 1980s, the integration of world capital markets that resulted from the removal of capital controls and innovations in financial markets produced significant changes in gross and net foreign asset positions worldwide (see Lane & Milesi-Ferretti (2006)). In the United States, both gross and net foreign borrowing rose sharply. Regarding net foreign credit, about half of the increase in the net debt-income ratio of the non financial sectors mentioned above was financed by a rise in net credit assets held by the rest of the world (see again the top panel of Figure 1), and this was also an unprecedented phenomenon in the post-war period. Before the mid 1980s, the U.S. fitted well the definition of financial autarky: The net debt of the domestic non financial sectors was almost identical to the net credit assets of the financial sector, with a zero net credit position for the rest of the world.2 In terms of gross positions, the second panel of Figure 1 shows that the foreign credit claims on U.S. non financial sectors grew sharply since 1985, while U.S. lending to foreigners (i.e. claims of the U.S. non financial sectors on foreign agents) experienced a relatively modest increase. As a result, net credit assets held by the rest of the world grew by 50 percent of U.S. GDP since 1982.  
The above trends identified in net credit assets are even more pronounced for net total financial assets and net Treasury securities, as shown in the bottom panel of Figure 1. The plot shows the net asset positions of the U.S. vis-a-vis the rest of the world as a ratio of the corresponding net asset positions held by the domestic non financial sectors for three asset categories: credit market assets (as in the top two panels), total financial assets, which include non-credit assets like equity, and U.S. Treasury bills. The ratios for credit assets and total financial assets hover near zero before the mid 1980s, reflecting again the fact that before financial globalization the U.S. was effectively in financial autarky. By the end of 2008, however, net credit assets held by the rest of the world amounted to 1/5 of U.S. net credit liabilities of the non financial sectors, and for total financial assets the ratio was even higher at about 1/3. For T-bills, the rest of the world increased its positive net position sharply with the collapse of the Bretton Woods system in the early 1970s, but even that increase dwarfs in comparison with the surge observed since the mid 1980s. By 2008, the rest of the world was a net holder of about one in every two T-bills held outside of the U.S. financial sectors.  
The fact that a large fraction of the credit expansion experienced by the U.S. economy was financed by foreign borrowing raises a key question: Did the globalization of financial markets contribute to the current crisis? In particular, we are interested in understanding how financial globalization contributed to the surge in debt in the United States, how it might have influenced the volatility of asset prices and the spillover of the crisis across countries.



From The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach

Global financing patterns have been at the center of debates on the global financial crisis in recent years. The global imbalance view, a prominent hypothesis, attributes the financial crisis to excess saving over investment in emerging market countries which have run current account surplus since the end of the 1990s. The excess saving flowed into advanced countries running current account deficits, particularly the U.S., thus depressing long-term interest rates and fuelling a credit boom there in the 2000s. According to this view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which was the epicenter of the financial crisis. Instead, we argue that a key cause of the global financial crisis was the dynamic expansion of balance sheets at large complex financial institutions (LCFIs)(Borio and Disyatat [2011] and Shin [2012]), driven by the endogenously elastic finance of global dollar funding in the global shadow banking system. The endogenously elastic finance of the global dollar contributed to the buildup of global financial fragility that led to the global financial crisis. Importantly, the supreme position of U.S. dollar as debt financing currency, underpinned by the dominant role of the dollar in the development of new financial innovations and instruments, and was a driving force in this endogenously dynamic and ultimately destructive process.


Key Sources of Research:



Financial Globalization, Financial Crises and Contagion

Enrique G. Mendoza

Vincenzo Quadrini

March 25, 2009






Global imbalances and the financial crisis: Link or no link?

by Claudio Borio and Piti Disyatat

Monetary and Economic Department May 2011






Global Imbalances and the Financial Crisis: Products of Common Causes

Maurice Obstfeld and Kenneth Rogoff

November 2009





U.S. Monetary Policy, ‘Imbalances’ and the Financial Crisis

Pierre-Olivier Gourinchas





The Global Saving Glut and the U.S. Current Account Deficit

Remarks by Governor Ben S. Bernanke

At the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia

March 10, 2005




International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007

Ben S. Bernanke, Carol Bertaut, Laurie Pounder DeMarco, and Steven Kamin





The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach

Junji Tokunaga and Gerald Epstein






Global Banking Glut and Loan Risk Premium

Hyun Song Shin

Princeton University hsshin@princeton.edu

January 2012





Global Banking Glut and Loan Risk Premium


Hyun Song Shin


Mundell-Fleming Lecture

IMF Annual Research Conference November 10-11, 2011





Global liquidity: where it stands, and why it matters

Speech by Jaime Caruana

IMFS Distinguished Lecture at Goethe University Frankfurt, 5 March 2014




Global savings glut or global banking glut?

Hyun Song Shin

20 December 2011



 Financial Globalization and the Crisis


Philip R. Lane

Trinity College Dublin and CEPR July 2012



Persistent unusually low interest rates. Why? What consequences?


Claudio Borio





Three BIS research themes in the Annual Report

Hyun Song Shin

Cross-border banking and global liquidity


by Valentina Bruno and Hyun Song Shin




Trilemmas and Tradeoffs: Living with Financial Globalization

Maurice Obstfeld

June 28, 2014




Dilemma not Trilemma: The global Financial Cycle and Monetary Policy Independence

Hélène Rey

Issued in May 2015




Financial Globalization and Monetary Policy

Steven B. Kamin






Trilemma, Not Dilemma:
Financial Globalisation and Monetary Policy Effectiveness


Georgios Georgiadis

Arnaud Mehl

January 2015




Financial Globalization and Monetary Policy

Michael B. Devereux and Alan Sutherland




Low long-term interest rates as a global phenomenon


Peter Hördahl, Jhuvesh Sobrun and Philip Turner






Globalization’s Effect on Interest Rates and the Yield Curve

by Tao Wu






Impact of Globalization on Monetary Policy

Kenneth S. Rogoff




A primer on ‘global liquidity’

Eugenio Cerutti, Stijn Claessens, Lev Ratnovski

08 June 2014











Global Liquidity: Public and Private

Jean-Pierre Landau










The Age of Secular Stagnation

The Age of Secular Stagnation




Why are interest rates so low?

Ben S. Bernanke

Monday, March 30, 2015

Why are interest rates so low?

Why are interest rates so low, part 2: Secular stagnation

Why are interest rates so low, part 3: The Global Savings Glut

Why are interest rates so low, part 4: Term premiums




Low Interest Rates




Why Are Interest Rates So Low? Causes and Implications

Stanley Fischer

October 2016





Longer-Term Challenges for the U.S. Economy

Stanley Fischer

November 21, 2016





The Eurodollar Market in the United States

Marco Cipriani and Julia Gouny




The FR 2420 Data Collection: A New Base for the Fed Funds Rate

Marco Cipriani and Jonathan Cohn




The New Overnight Bank Funding Rate

Marco Cipriani, Julia Gouny, Matthew Kessler, and Adam Spiegel




Eurodollar banking and currency internationalisation

Dong He and Robert McCauley





Segmentation in the U.S. Dollar Money Markets During the Financial Crisis

James J. McAndrews

May 19, 2009





All about the eurodollars

Izabella Kaminska











Low Equilibrium Real Rates, Financial Crisis, and Secular Stagnation

Lawrence H. Summers


Global dollar credit: links to US monetary policy and leverage

by Robert N McCauley, Patrick McGuire and Vladyslav Sushko





Francis E. Warnock

Veronica Cacdac Warnock







Low Interest Rates and Housing Booms: the Role of Capital Inflows, Monetary Policy and Financial Innovation


Filipa Sá

Pascal Towbin

Tomasz Wieladek

April 2011


BIS Annual Report 2014/2015
Global Liquidity and Drivers of Cross-Border Bank Flows


Eugenio Cerutti, Stijn Claessens, and Lev Ratnovski1

June 1, 2015

Networks and Hierarchies

Networks and Hierarchies


From  Networks and Hierarchies: Approaching Complexity in Evolutionary Theory

The natural world is infinitely complex and hierarchically structured. Hierarchy theory is an approach to understanding the way complex systems work by identifying levels of organization and their relationships in the context of scaling. In a broad sense, a system is a network of functionally interdependent and structurally interconnected components comprising an integrated whole. The complexity arises from intricate, nonlinear interactions of a large number of parts that such systems have, where the whole is more than the sum of its parts: That is, given the properties and the laws of interactions of parts, it is not a trivial matter to infer the properties of the whole.

Coining the term “hierarchy” is attributed to Pseudo-Dionysius the Areopagite, a philosopher and a theologian of the late fifth–early sixth century, who used the Greek word εραρχ α (“rule by priests”) in reference to ranks of celestial beings and ecclesiastical power in early Christian church (Hathaway 1969). Despite its narrow original meaning, hierarchical organization can be recognized in almost every system in the world from the structure of the natural world to all the domains of human life. Hierarchies are manifest in the physical composition of natural and artificial objects, engineered mechanisms, genealogical relationships, classification schemes, and socioeconomic organizations. The relative arrangement of levels and the nature of their interactions vary greatly depending upon the specific kind of hierarchy considered.

That hierarchy is a key structural principle of biological systems was first recognized by Woodger (1929), whose work influenced the development of hier- archical approaches across biological disciplines (e.g., Hennig 1950, 1966; Pattee 1973; Whyte 1969). In biology, the concept of hierarchy acquired a plethora of disparate meanings ranging from the descriptions of organization of knowledge to models of functional interactions of living systems to taxonomic classifications. The pervasiveness of hierarchies in nature was amply captured by Francois Jacob’s maxim, “every object that biology studies is a system of systems” (Jacob 1974).

Biological evolutionary theory is ontologically committed to the existence of nested hierarchies in nature and attempts to explain natural phenomena as a product of complex dynamics of real hierarchical systems. Consistent with the general tendency of complex systems to attain and remain in equilibrium, living systems display remarkable metastability despite non-equilibrial dynamics at all levels of organization triggered by extrinsic disturbances, suggesting that hierarchical systems have some common properties that are independent of their specific content and can be applied across physical, biological, or social sciences.

2.2 Hierarchical Dynamics

Two major types of interactions can be distinguished in a hierarchy: within and between levels. Entities at a given level interact directly with each other in the same dynamic process, whereas entities at different levels only interact in an aggregate fashion (Eldredge and Salthe 1984). The differences in the dynamics of processes between versus within levels ultimately arise from scalar differences (frequently of different orders of magnitude) in process rates, yielding a distinction between strong interactions with high-frequency dynamics within levels and weak interactions with low-frequency dynamics among levels (Simon 1962, 1973). Such non-transitivity of direct effects across levels (Salthe 1985) establishes the levels as quasi-independent (“nearly decomposable” sensu Simon 1962) systems allowing for investigating dynamics of individual levels on their own right (Bunge 1979; Levins 1970). Consequently, the details of within-level interactions can be ignored when considering between-level dynamics (Simon 1962). Scalar differences are also responsible for weaker integration of more inclusive units and weakening the strength of interactions at successive, higher levels of a hierarchy, making it more difficult for the investigator to draw boundaries around and characterize these units from the epistemological standpoint.



Key Sources of Research:


Networks and Hierarchies: Approaching Complexity in Evolutionary Theory

Ilya Tëmkin and Niles Eldredge




“Networks: between markets and hierarchies.”

Thorelli, Hans B.

Strategic management journal 7.1 (1986): 37-51.



Boundaries, Hierarchies and Networks in Complex Systems






Yaneer Bar-Yam, New England Complex Systems Institute, Cambridge, MA, USA




On the origins of hierarchy in complex networks

Bernat Corominas-Murtra, Joaquín Goñid, Ricard V. Solé and Carlos Rodríguez-Casoa




The Architecture of Complexity

Herbert A. Simon

Proceedings of the American Philosophical Society, Vol. 106, No. 6. (Dec. 12, 1962), pp. 467-482.



Self-organization, Emergence and the Architecture of Complexity