Financial globalisation since the 1990s has led to large holdings of cross-border assets and liabilities in many countries. This column analyses the yields on assets and liabilities for 20 advanced and 22 emerging economies over 1999-2023, and finds that they were on a mostly downward trend, before increasing from 2020. Yields are driven by movements in exchange rates and interest rates, with significant heterogeneity across types of investments. Furthermore, the net impact of recent interest rate increases on income balances can vary greatly depending on the specific composition of assets and liabilities.

Financial globalisation has been a central feature of the world economy since the mid 1990s, leading to large holdings of cross-border assets and liabilities (Milesi-Ferretti 2025). In addition to their size, international financial links are highly heterogeneous and changing. The different composition of countries’ external assets translates in very different returns (Maruhn et al. 2025). Furthermore, the central role of the dollar implies large spillovers of US policy (Acharya et al. 2025), but with a changing pattern: this role is now discussed, in a context of changing investment patterns (Bénassy-Quéré 2025, Bordo and McCauley 2025, Bossone 2025, Leipziger 2025) and correlations between different interest rates and exchange rates (Ahmed and Rebucci 2025, Kamin 2025).

While the discussion has tended to focus on the trade balance and the financial account, the primary balance of dividends and interest in the current account has received relatively less attention. While income flows have overall not kept pace with the rise of the value of cross-border holdings, they are far from marginal. Behar and Hassan (2022) show that the income balance amounts to at least half the trade balance for half the countries in their sample. In addition, trade and primary income balances show different cyclical patterns, in line with the finding of Adler and Garcia-Macia (2018) that the primary income flows do not stabilise imbalances. Joyce (2021) analyses the primary income flows from the heterogeneous asset and liability holdings of 26 emerging economies. The studies show a subtle impact of the exchange rate on the primary income balance. Behar and Hassan (2022) and Colacelli et al. (2021) find that a depreciation of the domestic currency increases income flows on both assets and liabilities, a positive correlation that leads to a small impact in net terms.

Patterns of international yields

In Donato and Tille (2025) we take a broad view of the yields on assets and liabilities for 20 advanced and 22 emerging economies from 1999 to 2023. Figure 1 shows that the yields – the ratio of dividends and interest earnings over the corresponding investment position – on assets (red lines) and liabilities (blue lines) have been on a downward trend in advanced economies until 2020, before markedly increasing. Yields for emerging economies also show a downward trend, albeit starting at a later point, with a pickup in recent years.

Figure 1 Yield on assets and liabilities, total (%)

Note: The figure shows the median value of the yield on assets (red line) and liabilities (blue line).

However, the decreasing trends of Figure 1 are uneven. Figures 2 and 3 show the yields on assets (left panels) and liabilities (right panels) by investment category for the median advanced and emerging economy, respectively. The downward movements have been driven by portfolio debt (green lines) and other investment (yellow lines) in advanced economies, consistent with the broad declines in interest rates and inflation. By contrast, yields on FDI (blue lines) and portfolio equity (red lines) have been more stable. Emerging economies also saw a decrease in the yields on portfolio debt and other investment, especially on the asset side.

Figure 2 Yields by investment category, advanced economies (%)

Note: The figure shows the median value of the yield on assets and liabilities by category for advanced economies.

Figure 3 Yields by investment category, emerging economies (%)

Note: The figure shows the median value of the yields on assets and liabilities by category for emerging economies.

Drivers of yields

We conduct a panel analysis of the yields for each of the various categories of investment (FDI, portfolio equity, portfolio debt, other (banking), reserves). As our income flows data are measured in US dollars, we first construct estimates on the currency composition of each category of assets and liabilities, building on Bénétrix et al. (2020). This step is important as a depreciation of the dollar vis-à-vis the currencies in which financial positions are denominated automatically raises the dollar value of the income stream even if the yield remains constant in the currency of denomination, as stressed by Behar and Hassan (2022) and Colacelli et al. (2021).

The (log) yields are regressed on the exchange rate between the dollar and the estimated basket of the corresponding holdings, the broad nominal dollar exchange rate, interest rates (three-month and ten-year) in the US and the country (for advanced economies), the VIX index, the excess bond premium (Scheubel et al. 2024, Gilchrist and Zakrajsek 2012), a global stock market factor premium (Scheubel et al. 2024, Habib and Venditti 2019), growth and inflation in the world and in the country.

Our econometric analysis shows that the impact is highly heterogeneous across types of investments. The main findings are:

• Movements between the dollar (in which positions and income streams are measured) and the currency basket in which positions are denominated impacts yields, as expected, although the effect is not precisely measured.
• A broad appreciation of the dollar reduces FDI yields, especially in advanced economies. This could reflect the use of the dollar as a dominant invoicing currency in international trade, with an appreciation depressing trade, to which multinationals are particularly exposed. The higher dollar could also dampen international credit and investment.
• An increase in US long-term interest rates raises yields on portfolio debt, other investment (banking), and reserves, as well as yields on FDI and equity liabilities in emerging economies.
• An increase in US short-term interest rates increases yields on other investment.
• GDP growth raises the yields on FDI positions, while inflation raises the one on other investment, especially in advanced economies.
• An increase in the VIX unexpectedly has a negative effect on yields.

A major aspect is that the effects listed above tend to be observed for both assets and liabilities. This stands in contrast to trade. For instance, a depreciation of the domestic currency raises exports and lowers imports, both leading to a higher trade surplus. The drivers of yields, however, move both receipts and payments in the same direction, making the impact on the net income ambiguous.

From yields to income flows

We assess the impact of the various drivers on the balance of payments by combining our estimates on the yields of the various investment categories (computed separately for advanced and emerging economies) with the actual composition of assets and liabilities (averaged over 2018-2022).

Our analysis shows that the impact of the US interest rate depends on the maturity considered. While an increase in the three-month rate leads to improvements in the income balance, an increase in the ten-year rate worsens it, especially in emerging economies (while a similar effect in all countries seems at odds with global adding up constraints, our analysis does not include financial centres). A dollar appreciation, working through both the currency composition of the holdings and the effect of a broad dollar appreciation, has a heterogeneous impact for advanced economies but improves the balance of emerging markets.

As the rise of interest rates during the recent inflation episode has turned the yields trend around, we assess the estimated impact of US and domestic interest rates, exchange rate, and VIX, from 2021 to 2023 using our panel estimates and the paths of these variables. Figure 4 shows the impact on gross income (sum of payments and receipts, top panel) and net income (bottom panel), contrasting advanced (left panels) and emerging economies (right panel). The increase in interest rates has clearly raised gross income flows. The impact on the income balance is quite contrasted, with advanced economies tending to see a deterioration (but with many exceptions) while emerging economies experienced an improvement.

While our estimates considered only some of the many drivers, they are in line with the observed changes. We also find that changes in the net income were correlated with the initial current account in advanced economies, with an improvement in countries that already had a current account surplus in 2021.

Figure 4 Impact of combined scenarios in 2023 in relation to 2021, % of GDP

a) Gross

b) Net

Note: Impact of the actual and expected changes of (US and domestic) interest rates, US dollar exchange rate, and world and domestic inflation since 2021 on the gross (top panel) and net (bottom panel) primary investment income (% of GDP), in 2023.

Lessons from our analysis

Our analysis shows that the primary income has gained relevance over the last couple of years. While the decrease in inflation has led short-term interest rates to move back down, albeit not fully, long-term rates remain elevated. In addition, one cannot draw simple relations (such as expecting a depreciation to improve the trade balance) as even global factors can have very different impact on primary income balances depending on the specific composition of assets and liabilities in the various countries.

Source : VOXeu