Global current account imbalances were a major subject of concern in the years before the recent financial crisis. It is shown that the expected (negative) equilibrium relationship between net foreign assets and the trade balance that had held in the previous twenty years appeared to break down...

We show that sovereign risk premium contains important information about the short run exchange rate dynamics in emerging economies and that net foreign assets play the key role in the link between the two variables: on the one hand, the accumulation of foreign assets reduces the sovereign risk...