Household Wealth and the Net International Investment Position

Aggregate household wealth dynamics are closely associated with fluctuations of the economy. However, little is known of the linkages between aggregate household wealth and the Net International Investment Position (NIIP),... [ view full abstract ]

Aggregate household wealth dynamics are closely associated with fluctuations of the economy. However, little is known of the linkages between aggregate household wealth and the Net International Investment Position (NIIP), which is particularly relevant in a world with increasing cross-border trade and financial interdependence. This paper assesses these previously unexamined co-movements with panel estimations and finds that increases in net household wealth are associated with deteriorations of the external balance. In addition, after decomposing wealth into changes in savings and valuation, it depicts a striking negative covariation pattern between the valuation adjustments of wealth and the net international debt position but not with the net international equity position. Accordingly, it offers suggestive evidence of wealth effects and highlights potential policy implications.