CID Working Paper No. 124, January 2006 (Revised September 2006)

Global Imbalances or Bad Accounting? The Missing Dark Matter in the Wealth of Nations*

Ricardo Hausmann and Federico Sturzenegger

Abstract 

This paper argues that current account statistics may provide a poor indication for the real evolution of a country’s net foreign assets. This may be due to a series of factors including the mismeasurement of FDI, unreported trade of insurance or liquidity services and debt relief. Because of these problems we suggest estimating net foreign assets by capitalizing the net investment income and then estimating the current account from the changes in this stock of foreign assets. We call dark matter the difference between our measure of net foreign assets and that portrayed by official statistics. We find dark matter to be important for many countries and that it relates to FDI flows, domestic volatility, and debt relief. We also find that, once dark matter is taken into account, global net asset positions appear to be relatively stable. In particular, the exports of dark matter of the US appear to be fairly steady and large enough to keep the US net asset position stable, casting doubts on the need for a major adjustment of the dollar or a large rebalancing of the global economy.

Keywords: global imbalances, United States current account deficit, valuation problems, Foreign Direct Investment (FDI)

JEL codes: F32, F34, F36, F41

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* This is a longer, more technical version of the authors' November 2005 working paper, "US and Global Imbalances: Can Dark Matter Prevent a Big Bang?" Also see their December 2005 Financial Times op-ed, "'Dark Matter' Makes the U.S. Deficit Disappear."

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