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Discussion Paper Details

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Title: From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege

Author(s): Pierre-Olivier Gourinchas and H�l�ne Rey

Publication Date: September 2005

Keyword(s): dollar exchange rate, financial adjustment channel, gross positions, net foreign assets, sustainability and trade adjustment channel

Programme Area(s): International Macroeconomics

Abstract: Does the centre 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 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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Bibliographic Reference

Gourinchas, P and Rey, H. 2005. 'From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5220