Net foreign assets and macroeconomic volatility

- We study net foreign asset, consumption, real exchange rate and real interest rate.
- Net foreign asset is positively associated with consumption and real exchange rate.
- Consumption responds more positively to net foreign asset in G7 countries.
- Real exchange rate is less influenced by net foreign asset in developing countries.

This study analyses the co-movements of net foreign asset accumulation, consumption, real exchange rate, and real interest rate in a cross section of countries. Our sample covers both industrial and developing economies, spanning 1981-2010 period. We find that the accumulation of net foreign assets is associated with increasing consumption and real exchange rate appreciation. In a cross section of countries, when a country increases its net foreign assets to GDP ratio by a one-standard deviation, consumption to GDP increases by 0.02% per year and real exchange rate appreciates by 2% per year. Consumption to GDP responds more positively to net foreign asset accumulation in G7 countries, +0.1 to +0.2% per year, while the response is smaller and negative in developing countries reporting a −0.02% per year. The real exchange rate appreciation, however, is about +3% per year in developing countries and only about +0.2% per year in OECD countries.