real stu (exports, imports, FDI, migration,..) International Macro: … · 2017. 10. 26. · Chapter 1. Introduction { The Balance of Payments The Current Account. CA consists of:

Chapter 1. Introduction – The Balance of Payments

Open Economy Macro: International Macro

International Economics:

International Trade: flows of “real stuff” (exports, imports, FDI, migration,..)

International Macro: flows of money and assets (current account, exchangerates, sovereign debt,...)

International Political Economy: international decision making (voting,negotiations, wars,...)

Professor Dr. Holger Strulik Open Economy Macro 1 / 36


Main Textbook: Schmidt-Grohe, Uribe, Woodford (2016): International Macro

Download: http://www.columbia.edu/~mu2166/UIM/index.html

Supplementary Textbook: Obstfeld and Rogoff (1996): Foundations ofInternational Macro, MIT Press.

Slides (and other stuff):http://www.holger-strulik.org/oem/oem_material.php


http://www.columbia.edu/~mu2166/UIM/index.html

http://www.holger-strulik.org/oem/oem_material.php


Tentative Outline of the Course:

1 The current account and global imbalances

2 A theory of current account determination

3 Current account determination in a production economy

4 External adjustments in small and large economies

5 Twin deficits: Fiscal and current account imbalances

6 International capital market integration

7 Financial development and global imbalances

8 Capital account liberalization and growth

9 Determinants of the real exchange rate

10 Aggregate demand shocks and real exchange rates

11 Exchange rate policy and unemployment

12 The European balance of payment crisis

13 Sovereign debt

14 More on debt

15 Monetary policy and exchange rate determination



1. The Current Account and Global Imbalances

All international transactions of a country are recorded in the balance of payments

2 parts:

I Current account (CA): net exports of goods and services plus internationalpayments of income

I Financial account (FA): sales of assets to foreigners minus purchases of assetsfrom foreigners

standards of book-keeping (double-entry): fundamental balance of paymentsidentity:

CA ≡ −FA



The Current Account.

CA consists of:

I Trade balance (TB) merchandize trade balance plus services balance

I Income Balance (IB): net investment income (NII) plus net internationalcompensation of employees

I Net unilateral transfers (UT): remittances, grants, aid

I Capital account (capital transfers due to debt forgiveness, migration,international insurance etc.): This component is ignored in the expositionbecause it is not substantial for most countries

Thus:

CA ≡ TB + IB + UT



Financial account:

(plus) Net increase of foreign-owned assets from home: foreign purchases and sales ofhome securities; home borrowing of foreign banks; foreign direct investment at home

(minus) Net increase of home-owned assets from abroad: home purchases and sales offoreign securities; home bank lending to foreigners; home direct investment abroad



The U.S. Balance-of-Payments Accounts in 2014

Billions Percentage

Item of dollars of GDP

Current Account -389.5 -2.2

Trade Balance -508.3 -2.9

Balance on Goods -741.5 -4.3

Balance on Services 233.1 1.3

Income Balance 238.0 1.4

Net Investment Income 247.4 1.4

Compensation of Employees -9.4 -0.1

Net Unilateral Transfers -119.2 -0.7

Private Transfers -104.9 -0.6

U.S. Government Transfers -14.3 -0.1

Source: Bureau of Economic Analysis, http://www.bea.gov.



and for “us”...

Source: Bundesbank: https://www.bundesbank.de/Navigation/DE/

Statistiken/Aussenwirtschaft/Zahlungsbilanz/zahlungsbilanz.html


https://www.bundesbank.de/Navigation/DE/Statistiken/Aussenwirtschaft/Zahlungsbilanz/zahlungsbilanz.html

https://www.bundesbank.de/Navigation/DE/Statistiken/Aussenwirtschaft/Zahlungsbilanz/zahlungsbilanz.html


Mio €

Leistungsbilanz

Warenhandel (fob/fob) 1) Dienstleistungen (fob/fob) 3) Primäreinkommen Sekundäreinkommen

darunter:Ergänz-ungen zumAußen-handel,

Ausfuhr Einfuhr Saldo Saldo 2) Einnahmen Ausgaben Saldo Einnahmen Ausgaben Saldo Einnahmen Ausgaben Saldo

Zeit 1 2 3 4 5 6 7 8 9 10 11 12 13

2002 611 848 469 745 + 142 103 + 6 008 107 806 153 245 − 45 440 107 664 133 259 − 25 596 41 522 70 935 − 29 4132003 619 677 489 656 + 130 021 − 2 105 103 853 152 560 − 48 708 111 694 130 614 − 18 920 50 266 81 313 − 31 0472004 686 081 532 915 + 153 166 − 6 859 118 814 157 527 − 38 713 142 348 125 488 + 16 860 38 668 68 776 − 30 1092005 739 949 582 940 + 157 010 − 6 068 128 397 168 996 − 40 600 167 339 146 434 + 20 905 42 036 73 621 − 31 5852006 841 482 680 035 + 161 447 − 4 205 144 301 178 942 − 34 641 208 671 167 217 + 41 453 39 489 71 789 − 32 300

2007 926 777 724 788 + 201 989 − 922 154 155 189 036 − 34 881 245 378 209 045 + 36 332 42 075 75 879 − 33 8042008 948 735 764 214 + 184 521 − 3 586 164 590 196 057 − 31 467 197 571 172 846 + 24 724 44 319 78 779 − 34 4612009 770 389 629 222 + 141 167 − 6 064 159 648 179 296 − 19 648 183 228 128 471 + 54 757 41 199 76 242 − 35 0432010 918 340 757 194 + 161 146 − 5 892 171 743 198 783 − 27 041 199 738 149 073 + 50 665 42 328 82 209 − 39 8802011 1 030 114 866 687 + 163 426 − 8 900 181 374 212 948 − 31 574 219 465 151 230 + 68 235 50 779 85 788 − 35 010

2012 1 071 431 871 031 + 200 401 − 10 518 196 509 229 284 − 32 775 203 734 138 876 + 64 858 52 747 91 641 − 38 8942013 1 080 212 867 550 + 212 662 − 3 663 205 628 247 004 − 41 376 190 437 128 468 + 61 969 60 095 103 734 − 43 6392014 1 115 751 887 390 + 228 361 − 5 873 224 463 249 786 − 25 323 189 380 133 204 + 56 177 61 951 103 139 − 41 1882015 1 179 210 918 028 + 261 182 − 2 668 246 160 264 762 − 18 602 192 837 135 467 + 57 370 65 207 105 193 − 39 9872016 1 193 306 923 506 + 269 800 − 1 434 254 300 275 518 − 21 218 188 852 136 716 + 52 136 64 880 104 881 − 40 001

2014 3.Vj. 282 119 221 581 + 60 537 − 2 570 56 484 69 405 − 12 921 45 570 29 886 + 15 683 13 416 21 259 − 7 843



Kapitalbilanz (Zunahme an Nettoauslandsvermögen: + / Abnahme an Nettoauslandsvermögen: -)

Saldo des übrigen Kapitalverkehrs

darunter:

Saldo Saldo derder Finanz- Langfristige Kurzfristige statistisch

Saldo der derivate und Kredite der Kredite der nichtSaldo der Vermögens- Saldo der Saldo der Mitarbeiter- Monetären Monetären aufglieder-Leistungs- änderungs- Direkt- Wertpapier- aktien- Finanz- Finanz- Währungs- Saldo der baren Trans-bilanz bilanz 4) anlagen optionen Insgesamt reserven aktionen 8)investitionen institute 5) 6) institute 6) 7) Kapitalbilanz

14 15 16 17 18 19 20 21 22 23 24 Zeit

+ 41 655 − 4 010 − 36 743 − 66 945 + 496 + 113 294 + 33 790 − 224 − 2 065 + 8 038 − 29 606 2002+ 31 347 + 5 920 − 23 753 − 54 391 + 1 513 + 124 635 + 32 555 + 24 947 − 445 + 47 559 + 10 292 2003+ 101 205 − 119 + 24 567 − 15 058 + 6 578 + 98 217 − 6 300 + 31 771 − 1 470 + 112 834 + 11 748 2004+ 105 730 − 2 334 + 21 786 + 29 865 + 7 961 + 39 006 + 69 870 − 8 939 − 2 182 + 96 436 − 6 960 2005+ 135 959 − 1 328 + 48 646 + 18 328 + 4 504 + 88 598 + 71 490 + 26 068 − 2 934 + 157 142 + 22 511 2006

+ 169 636 − 1 597 + 65 105 − 153 824 + 83 570 + 187 365 + 96 582 + 53 695 + 953 + 183 169 + 15 130 2007+ 143 318 − 893 + 43 268 − 31 933 + 27 651 + 80 343 + 143 998 − 28 982 + 2 008 + 121 336 − 21 088 2008+ 141 233 − 1 858 + 32 203 + 85 437 − 6 843 + 10 248 − 25 880 − 30 496 + 8 648 + 129 693 − 9 683 2009+ 144 890 + 1 219 + 45 158 + 112 835 + 13 539 − 80 388 − 77 680 − 12 691 + 1 613 + 92 757 − 53 351 2010+ 165 078 + 419 + 7 492 − 34 315 + 28 591 + 116 254 + 12 911 − 12 120 + 2 836 + 120 857 − 44 639 2011

+ 193 590 − 413 + 26 449 + 51 786 + 24 138 + 47 748 − 47 821 + 8 932 + 1 297 + 151 417 − 41 759 2012+ 189 616 − 563 + 20 107 + 158 100 + 23 894 + 22 421 − 24 946 − 4 699 + 838 + 225 360 + 36 307 2013+ 218 026 + 2 355 + 72 030 + 133 496 + 31 896 + 3 772 + 4 407 − 12 308 − 2 564 + 238 630 + 18 248 2014+ 259 963 − 635 + 54 073 + 196 946 + 26 202 − 40 406 + 472 − 5 245 − 2 213 + 234 603 − 24 725 2015+ 260 716 + 1 112 + 22 627 + 207 911 + 32 792 − 21 430 + 21 521 + 10 601 + 1 686 + 243 586 − 18 242 2016



And in % of GDP:

GDP 2015: 3460 billion

trade balance 269-21= 248 billion

trade balance surplus: 7.1 % percent of GDP

current account surplus: 7.5 % percent of GDP

→ Germany is “Export-Weltmeister”

is to be “Export-Weltmeister” a desirable goal?

in terms of GDP many other countries have a higher trade balance surplus...



country current account in % of GDP



TB and CA in 2005 for selected countries

−15 −10 −5 0 5 10 15−15

−10

−5

0

5

10

15

Arg

China

Ire

Mex

Philippines

USA

45o

100 × TB/GDP

100 ×

CA

/GD

P



Rule of thumb: CA ≈ TB

however, there are many exceptions...

Trade Balance and Current Account as Percentages of GDP

in 2005 for Selected Countries

Country TB/GDP CA/GDP

Argentina 5.9 2.9Ireland 11.7 -3.5Philippines -5.6 1.9United States -3.4 -3.0

Argentina: Trade balance surplus but negative income balance due to interestpayments on foreign debt.

Ireland: Large trade balance surplus but even larger income balance deficit (due tohuge capital inflows in the 1980s and 1990s Ireland has to pay income on its largeexternal obligations).

Philippines: Trade balance deficit but large positive UT due to remittances fromabroad



Long-run trends

“old” stylized fact: the CA is on average balanced

“new” phenomenon (since the 80’s) some countries run always deficits,others always surpluses

these seem to get larger over time

Global imbalances...





Source: Eurostat



Source: Eurostat



Net International Investment Position (NIIP)aka net foreign asset position

The NIIP

is a country’s net foreign wealth

is the difference between foreign asset holdings by citizens of the homecountry and home asset holdings by foreigners

reflects a country’s net borrowing needs (whether a country is a debtor or acreditor)

Thus∆NIIP = CA + VC ,

VC : valuation changes, e.g. due to currency appreciations/depreciations





Valuation Changes and the NIIP.

depreciation of the Dollar in the 2000s

foreign stock markets outperformed the US stock market in 2002 to 2007(return of 190% compared to 90%)

hypothetical NIIP2014 = NIIP1976 + CA1977 + CA1978 + . . . + CA2014

hypothetical NIIP: $ 9.9 trillion (57% of GDP)

actual NIIP: $ 6.9 trillion (40 % of GDP)



The U.S. NIIP and the Hypothetical NIIP Since 1976 (billions of dollars)

1980 1985 1990 1995 2000 2005 2010−10000

−8000

−6000

−4000

−2000

0

2000

Year

Bill

ions o

f dolla

rs

Hypothetical NIIP →

← Actual NIIP

→ In 2015 foreign investors owned 20% of US stocks and 43% of US bonds.Professor Dr. Holger Strulik Open Economy Macro 22 / 36


Cumulative Current Account Balances Around the World: 1980-2012, billions of U.S. dollars

2012, billions of U.S. dollars.



Big lenders:

I Oil exporting countries: Russia, Middle East, Norway, VenezuelaI China, Japan, Germany

Big borrowers:

I USA, Southern Europe, Turkey, Brazil, Great Britain, Australia

Are these global imbalances sustainable?

What happens if the answer is negative?







Excursion: The Negative–NIIP–and-Positive–NII Paradox.

USA has a negative NIIP. It is a debtor

as a consequence, we would expect that net investment income (NII) is alsonegative

Yet. . .



Negative NIIP: A Paradox?

1980 1985 1990 1995 2000 2005 2010−400

−300

−200

−100

0

100

200

300

Year

US

Net In

vestm

ent In

com

e, $bn

US

NIIP

, $bn

−8000

−6000

−4000

−2000

0

2000

4000

6000



Potential explanation 1: “Dark Matter”:

Underestimation of US net foreign asset holdings

entrepreneurial capital and brand capital not measured accurately; however,the associated income might be accurately measured

Example: McDonald’s branch in Moscow. The brand name generates extraincome on top of the amount of dollars invested



How large would Dark Matter be?

In this case true NIIP (TNIIP):

TNIIP = NIIP + DM,

where DM is Dark Matter. Then

TNIIP = NII/r .

From Table slide 7: NII= 247 billion $. For an interest rate r of 5% thiswould be TNIIP = 0.247/0.05 = 4.9 trillion $. The measured NIIP is -5.3trillion → Dark Matter 10.2 trillion $!!!



Potential Explanation 2: Differential Rate of Return.

suppose: rate of return of foreign investors on US assets is lower than therate of return of US investors on foreign assets

e.g.: foreigners hold low risk assets (US Treasury Bills), while US investorshold more risky foreign stocks with relatively higher returns

ThusNII = rAA− rLL,

A:gross assets; L: gross liabilities

In 2014: NII: $ 0.25 trillion; L = 31.6 trillion $; A = 24.7 trillion $.

Take rL = 0.125%, the interest rate on one-year Treasury securities

⇒ rA = 0.84%, a spread (risk premium) of about 0.7% → empirically moreplausible than 10.2 trillion $ of Dark Matter.

End of Excursion



Current Account Sustainability

1. Is a Perpetual TB Deficit Possible?

Suppose: 2 periods

B∗1 : NIIP of the home country at the end of period 1, NII1 = rB∗

0 .

Suppose: no international labor income, no unilateral transfers, no valuechanges

Then

CA1 = B∗1 − B∗

0 = rB∗0 + TB1

⇒ B∗1 = (1 + r)B∗

0 + TB1

⇒ B∗2 = (1 + r)B∗

1 + TB2

Eliminate B∗1 :

B∗2 = (1 + r)[(1 + r)B∗

0 + TB1] + TB2

⇒ (1 + r)B∗0 =

B∗2

1 + r− TB1 −

TB2

1 + r



No-Ponzi-Game Condition: B∗2 ≥ 0, End (Transversality) Condition: B∗

2 ≤ 0

This leads to B∗2 = 0 and

(1 + r)B∗0 = −TB1 −

TB2

1 + r

Initial NIIP must equal the present value of future trade deficits

US is net foreign debtor. → it will have to run a trade surplus at some point inthe future

a country can run a perpetual TB deficit if its initial NIIP is positive.



2. Is a Perpetual CA Deficit Possible?

Recall: B∗1 − B∗

0 = CA1 and B∗2 − B∗

1 = CA2. Eliminating B∗1 and using B∗

2 = 0,we get

B∗2 − (CA1 + B∗

0 ) = CA2

⇒ B∗0 = −CA1 − CA2

Initial NIIP must equal the sum of its CA deficits

Negative initial NIIP has to be repaid by at least one positive future CAsurplus such that (CA1 + CA2 > 0)]

a country can run a perpetual CA deficit if its initial NIIP is positive.

This result does not necessarily hold for infinite horizons: sufficient: perpetual CA deficits possible with non-positive initial NIIP. Foreign debt has to growat a rate less than the interest rate. This requires the TB to be positive and to increases over time (for partial debt repayments). This in turns requires agrowing economy, otherwise the required TB surplus would exceed its GDP at some point.



Useful Accounting Identities: Savings, Investment, and the CurrentAccount.

Recall

CAt = B∗t − B∗

t−1 (in the absence of valuation changes),

CAt = TBt + rB∗t−1 = Xt − IMt + rB∗

t−1,

Qt = Ct + It + Gt + Xt − IMt .

Thus

TBt = Qt − Ct − It − Gt ⇒ CAt = rB∗t−1 + Qt − Ct − It − Gt .

in which Qt is GDP and Yt = Qt + rB∗t−1 is national income (GNP). This provides

CAt = Yt − Ct − It − Gt . (1)



Define National Savings: St = Yt − Ct − Gt . Thus

CAt = St − It

Define Domestic Absorption: At = Ct + It + Gt . Thus

CAt = Yt − At

To summarize, we have 4 alternative expressions for the current account:

CAt = B∗t − B∗

t−1

CAt = rB∗t−1 + TB

CAt = St − It

CAt = Yt − At


Documents

real stu (exports, imports, FDI, migration,..) International Macro: … · 2017. 10. 26. · Chapter 1. Introduction { The Balance of Payments The Current Account. CA consists of: