Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/175698 
Year of Publication: 
2017
Series/Report no.: 
ECB Working Paper No. 2074
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
In light of persistently large net foreign liability (NFL) positions in several euro area countries, we analyse 138 episodes of sizeable NFL reductions for a broad sample of advanced and emerging economies. We provide stylised facts on the channels through which NFLs were reduced and estimate factors which make episodes 'stable', i.e. sustained over the medium term. Our findings show that while GDP growth and valuation effects contribute most to NFL reductions overall, stable reduction episodes also require positive transaction effects (i.e. current account surpluses), in particular in advanced economies. Considering the different components of a country's external balance sheet, we observe that reduction episodes were almost exclusively driven by a decline in gross external liabilities in emerging economies, while in advanced economies also gross external asset accumulation contributed significantly, in particular in stable episodes. Our econometric analysis shows that NFL reductions are more likely to be sustained if a country records strong average real GDP growth during an episode and exits the episode with a larger current account surplus. Moreover, we find evidence that nominal effective exchange rate depreciation during an episode is helpful for achieving episode stability in the short run, while IMF programmes and sovereign debt restructurings also contribute to longer term stability.
Subjects: 
net foreign assets
external imbalances
stock imbalances
external adjustment
valuation effects
JEL: 
F21
F32
F34
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-2796-3
Document Type: 
Working Paper

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