This is not a recent problem: the first IMF report on this issue, appearing in Report on the World Current Account Discrepancy , observed that a substantial discrepancy had existed since the s. In former Federal Reserve Board governor H. Consequently, the U. Correspondingly, U. There would be corresponding reductions in industrial country and LDC balances reducing their current account balance and increasing their capital account balance.
International reserve assets consist of foreign exchange holdings currency and short-term assets that are held by public central bank and government or private individuals and firms. See Chuhan et al. Figure 4 also shows an implausible variability in the U. Figure 1 World Financial Flows. The available evidence makes the second explanation more likely than the first. About the Author Mack Ott is an international economic consultant whose major assignments have been in the former Soviet Union countries, the Balkans, and Egypt.
Feldstein, Martin, ed. International Capital Flows. Heller, H. Hearing before the Joint Economic Committee, 98th Congress. Washington, D. Government Printing Office, International Monetary Fund. Report on the World Current Account Discrepancy. September Ott, Mack. Exports Been Larger than Reported? Additionally, many individuals see the purchase of real estate as an investment that produces rental income.
These may classified as investment or business capital flows depending on the analysis. In emerging economies, capital flows can be particularly volatile as the economy may experience periods of rapid growth followed by subsequent contraction. Increased capital inflows can lead to credit booms and the inflation of asset prices, which may be offset by losses due to depreciation of the currency based on exchange rates and declines in equity pricing.
Emerging economies also are quite sensitive to flows of foreign direct investment FDI , which takes place when an investor, corporation, or foreign government invests directly in, or establishes foreign business operations or acquires foreign business assets abroad.
Often, FDI is a large source of capital flows to a country and greatly supports the economy. In India, for instance, periods of fluctuation have been noted beginning in the s. Capital flows during the earlier period, from the s into the early s, was marked by steady growth, transitioning to a rapid influx of funds between the early s and This rapid growth eventually shifted, partially due to the implications of the financial crisis in , leading to a high level of volatility regarding capital flows.
One of the biggest investing trends of the past several years involves the massive amounts of capital flow from active management into passive strategies such as exchange-traded funds ETFs. The path of capital flows also moved to other asset classes. Real Estate Investing.
Investing Essentials. Fiscal Policy. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. In these cases, unless the Federal Reserve Bank of New York contacts the transactors, these transactions are not captured by the existing system. In principle, the S form reporting requirement extends to all U.
Although reports filed by large financial institutions cover many transactions and transactors, given the changing international financial trading environment, the number of filers of monthly reports—about —casts doubt that the data fairly represent the cross-border business done by residents, including those removed from the traditional channels of resident financial institutions.
A second difficulty relates to U. Eurobonds account for most U. When a U. Although the Federal Reserve Bank of New York or BEA can track these issues when they are well publicized, comprehensive coverage is difficult to obtain. Similarly, domestic borrowers in domestic markets may not know when the resident lender has resold a loan to a foreigner.
Although there is a provision for recovering such resales of loans—on the BL-2 form through custodial reporting when the originating lender acts as the loan-servicing agent and a foreign bank is the purchaser—such transactions involving nonbank entities may not be adequately captured. In addition to these examples of capital inflows that may not be captured, unreported capital outflows pose even greater problems, since it is more difficult to monitor financial activities undertaken abroad by residents.
Global studies on capital flows conclude that most countries, including the United States, are better positioned to capture inflows of capital in their statistical frameworks than outflows by residents. In some countries, not especially the United States, there is also an incentive to hide outflows of funds illegally or to avoid taxes or other restrictions. The last Treasury Department benchmark survey of U. This raises the concerns about the adequacy of the coverage of U.
A third difficulty with securities data is the proliferation of short-term marketable instruments and derivative instruments such as warrants, options, puts, and calls. These are not ordinarily covered by the TIC S forms, which deal primarily with long-term securities. The S forms cover warrants and options only when the underlying security is a stock or long-term bond.
But since data on purchases and sales of these instruments are not disaggregated with purchases and sales of U. And all other options or warrants are not covered. Although BEA includes margin accounts and profits and losses on. In addition, as noted above, limited partnerships are not adequately covered.
A fourth difficulty—which generally applies to data on U. The latter often act as intermediaries on behalf of residents of many countries. In the U. As a result, when such transactions are reported, they are often reported as transactions between the United States and countries with well-developed financial markets, such as the United Kingdom and Switzerland, instead of the country that is the ultimate source of foreign funds or the ultimate destination of U.
Consequently, the U. In those foreign financial centers, the statistical offices tend to net out their foreign-to-foreign transactions on the ground they have no relation to the economies of those centers, so that it is not possible, in most cases, to rely on data collected by partner countries as a check on the data available to the home country.
International comparisons are further made difficult by the varying data definitions used by different countries. For example, there are sizable discrepancies between U. Treasury securities, because the Japanese data include all Japanese purchases of U. Treasury securities worldwide while the U. Treasury securities sold directly to Japan Stekler, b. A fifth difficulty with securities data concerns changes taking place in the institutional and functional arrangements of financial organizations.
One change is the increased complexity of individual organizations: as they develop new techniques and instruments and spread around the world, the responsibility for reporting on U. There are numerous difficulties related to the use of the TIC B forms for banking that can distort the data. A basic problem is that the B form data are end-month positions, which must be converted into flows for use in the balance-of-payments accounts.
This means that write-offs or renegotiated balances must be detected and adjusted from the flows, and balances in foreign currencies must be adjusted to reflect changes in the foreign exchange value of the dollar. In practice, however, this is not done in the U. In addition, apparent flows may occur because an address changes from domestic to foreign, or vice versa. All these adjustments can result in large swings in the statistical discrepancies in the balance-of-payments accounts.
Furthermore, although it appears that U. The problems concern whether the instructions for the forms are always fully understood and acted on properly and whether accounts owned by foreigners in the United States can always be identified as such by reporting banks.
It is comparatively simple for a non-resident to acquire a U. Interbanking business between U. However, cross-border banking is increasingly done without the intervention of international banking facilities.
This is a gap in the statistics for which banks are not responsible, but it means that reliance on reporting by banks no longer gives the assurance of nearly complete coverage that was assumed in earlier years. Another change of considerable importance is the growth of direct transactions between nonfinancial lenders and borrowers, with financial intermediaries increasingly acting as agents or arrangers of deals for a fee or commission.
This process is partly driven by the tightening of minimum capital standards for internationally active banks by the Basle Committee on Banking Supervision, which indirectly encourages banks to do business in ways that do not appear directly on their balance sheets.
Under these circumstances, it is unlikely these transactions are included in the TIC reporting system. Many attempts have been made to broaden the coverage of the TIC C forms and to review the accuracy of reporting for transactions by nonbanking businesses, but the results of efforts to include more respondents or detect significant errors in reporting have been only marginally successful.
Current filers are believed to include only a fraction of those that should report. One reason to doubt the effectiveness of the C forms comes from comparing U. On the other side of the accounts, the TIC reports that the liabilities of U. Although there are differences between the TIC and the BIS and IMF reporting systems in definition and, in particular, in coverage, such sizable discrepancies suggest the need for an examination of the possibility of underreporting in the U.
Currently, increases in foreign holdings of U. Yet these holdings represent noninterest bearing obligations of the U. Unreported currency shipments can be related to drug trade, to money brought in and out of the country by tourists, and to money mailed by U. On the basis of various surveys of household and business currency holdings, IRS estimates of the magnitude of drug trade, estimates of currency lost or destroyed, and other sources, it has been estimated that as much as one- to two-thirds of U.
Increases in foreign holdings of U. An accurate account of foreign assets in the United States would require that data gaps on the Treasury CMIR, as well as currency flows related to drug trade, tourists, and other transfers, be closed.
Unlike data on incomes on direct investment, which are reported by filers, data on incomes on portfolio investment are largely estimated by BEA, on the basis of accumulating stocks derived from Treasury 's TIC reports and rates of return on these investments assumed by BEA. Both inadequate data on portfolio investment as filed in the TIC reports and inappropriate rates of return applied by BEA can result in misleading estimates on portfolio investment incomes.
A study on statistical discrepancies in the world's current account identified portfolio investment incomes as one of the most serious problem areas International Monetary Fund, a. Reported portfolio investment payments worldwide far exceeded reported portfolio investment receipts.
However, as fiscal and monetary support unwinds, we can expect more distressed assets coming to the market next year. Another potential source of supply comes from the rotation of real estate assets. Assuming a typical five-year hold or financing period, by looking at transactional activity, we can predict the types of assets for the coming year.
In short, we should expect to see a range of assets — from traditional office and through to the industrial, residential and alternatives sectors coming to the market for rotational reasons in , even if some investors extend their business plans. These should offer a mix of cyclical and core opportunities.
It is also useful for investors to monitor private equity activity, which is often the first mover into a market and therefore a leading indicator. Private equity activity has risen across sectors in the UK, and a large rise in Switzerland is centred around the purchase of a retail portfolio, with units in some innovation-led cities.
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