Growing imbalances of cross-border investment incomes: A ‘Fault Line’ in the Eurozone?

07  October 2021    3:00 pm CEST

Konstantin M. Wacker, University of Groningen (Netherlands)

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The investment income balance has become an important component of current account imbalances – magnitudes above 5% of GDP are not uncommon in major economies. This paper investigates trends, dynamics, and potential determinants of cross-border investment income flows. The essential question I explore in this paper is whether those investment income imbalances can become a substantial problem for countries in the Eurozone, which lacks the exchange rate as an adjustment mechanism for such imbalances.

I find no evidence for a particularly persistent or divergent pattern of imbalances in Euro area countries. However, investment incomes behave fundamentally different from other current account components and a negative association between the two is found exclusively for Euro area countries. This calls for a much more differentiated perspective on the current account in academic analysis and policy.

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Konstantin M. Wacker

Konstantin M. Wacker is an assistant professor at University of Groningen, Netherlands. He has worked and consulted for the World Bank, the International Monetary Fund, the European Central Bank, UNU-WIDER, and the Austrian Central Bank. His research investigates questions of macroeconomic development and globalization, particularly foreign direct investment and export quality.

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Keywords: Global imbalances, current account, international investment position, balance of payments

JEL classification: F3, F45

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