The Evolution of Italy's Investment Income Balance

Abstract

This paper analyses the evolution of Italian investment income flows in relation to the corresponding financial stocks in the international investment position. The period under scrutiny is from 1999 to 2016, covering all developments since the beginning of monetary union. The analysis is based on a decomposition framework which allows us to disentangle investment income changes into three elements: (i) variations due to changes in the international investment position (stock effect); (ii) variations due to changes in the yields accruing to the underlying stocks (yield effect), and (iii) variations due to changes in the financial instrument composition of assets and liabilities (composition effect). The most important driver of Italy’s investment income balance variations is the yield effect. The stock and the composition effects are less significant: the former effect contributed to the worsening balance of payments in the first half of the period but waned thereafter; the latter effect strengthened after 2008. Applying this analytical framework to the other three main euro-area countries confirms the key role of the yield effect in shaping the short-term dynamics, and shows the different role of stock and composition effects in shaping the longer-term dynamics.