A Portfolio Approach to Global Imbalances

We develop a portfolio-based framework to understand the deterioration of the U.S. net foreign asset (NFA) position and the returns earned on U.S. NFA (exorbitant privilege). We show global savings gluts and monetary policies widened the U.S. NFA position, while investor demand shifts offset this widening. Moreover, U.S. privilege declined after 2010, in accordance with declining debt issuance and increasing foreign demand for U.S. equity. Our framework highlights a quantity dimension of the U.S. privilege: demand for U.S. debt is highly inelastic, allowing the U.S. to issue substantially more debt for a given yield increase