Long-term capital movements

International financial integration allows countries to become net creditors or net debtors with respect to the rest of the world. In this paper, we show that a small set of fundamentals-shifts in relative output levels, the stock of public debt, and demographic factors-can do much to explain the evolution of net foreign-asset positions. In addition, we highlight that "external wealth" plays a critical role in determining the behavior of the trade balance, both through shifts in the desired net foreign-asset position and through the investment returns generated on the outstanding stock of net foreign assets. Finally, we provide some evidence that a portfolio balance effect exists: real interest-rate differentials are inversely related to net foreign-asset positions.