Exchange rate movements and the U.S. international balance sheet

Recent research has examined the evolution of the NIIP and has found that current account deficits and the associated net financial inflows are not the only factors influencing it; rather, research finds that changes in asset prices and especially in exchange rates have played an important role recently because of their effect on the values of the stocks of assets and liabilities that make up the NIIP. ; In this Economic Letter, I review this literature, discuss these determinants of the NIIP, and provide some evidence on their relative quantitative importance. In particular, the evidence suggests that since the late 1990s, exchange rate movements have had a more significant effect on the value of U.S. assets abroad and, therefore, have played a larger role in shaping the evolution of the NIIP.