ERI Discussion Paper Series No.51
The determination of investment income in a world model
A linked approach

November 1990
Richard Herd
(Economic & Statistics Department, OECD)


1. A world economic model rests on the trade and financial linkages between countries and regions. The modelling of trade linkages has been well developed. Many researchers have studied this area using a database that is large, well-maintained and developed in great detail. Exchange rate linkages have also been well explored. The flows of investment income have been modelled less. The continuing imbalances in world trade have, over a period of time, generated large imbalances in stocks of assets, increasing the significance of investment income flows. While surpluses and deficits in trade can change quite rapidly in response to underlying determinants, net investment income flows change much more slowly. Changes in interest rates affect only the magnitude of net income balances. Their sign is only changed by the longer term cumulations of stocks and so, as a result, income imbalances can perist well after the initial trade imbalances have disappeared. For this reason, the projection of investment income has become an important element in the medium term analysis of current accounts.

2. This study suggests a possible way of modeling investment income flows in a consistent fashion. The proposed model should ensure that when investment income payments change, investment income receipts change by the same amount. The paper first looks at the quality of the underlying data and shows that it is possible both to make a very provisional country-by-country allocation of the discrepancy and to model the way in which the reported world discrepancy has evolved during the middle of the 1980's. The paper then considers the linkages between world interest rates and the rates of return on both world asset and liability portfolios. This information suggests a suitable method for modelling investment income credits and debits in a consistent fashion. Estimates are then presented both investment income debit and credit equations. Finally the paper suggests a method for allocating the remaining differences between debits and credits, so that in simulation, a world model would not produce discrepancies in the overall balance of investment income.

Structure of the whole text

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  2. page2
  3. page3
    An examination of the underlying investment income data
  4. page4
    The reasons for the world investment income discrepancy
  5. page8
    A projection of the world discrepancy from 1983to 1988
  6. page11
    Some considerations for the modelling of investment income flows
  7. page12
    A model of US investment income debits
  8. page13
    World investment income flows and rates of return
  9. page16
  10. page18
    The estimation results for the investment income debits equations
  11. page21
    The specitication if the investment income credits equations
  12. page23
    The estimation results for the investment income credits equations
  13. page25
    A method for removing residual fluctuations in the world discrepancy
  14. page26
  15. page28
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