Household Wealth & the Net International Investment Position

Abstract

Aggregate household wealth dynamics are closely associated with fluctuations of the economy. However, the linkages between household wealth dynamics and cross-border financial holdings have remained unexamined. Thanks to the recent assembly of an essential dataset, this paper assesses these co-movements in selected advanced economies. We establish that increases in net household wealth are associated with deteriorations of the Net International Investment Position (NIIP). This pattern is primarily driven by valuation changes in wealth (mostly through house price appreciation). Overall, we find that capital gains on household wealth are strongly related to the accumulation of net external debt liabilities, a key indicator of financial vulnerability.