Open Economy Macro: International Macro

Transcription

1 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, exchange rates, sovereign debt,...) International Political Economy: international decision making (voting, negotiations, wars,...) Professor Dr. Holger Strulik Open Economy Macro 1 / 36

2 Main Textbook: Schmidt-Grohe, Uribe, Woodford (2016): International Macro Download: Supplementary Textbook: Obstfeld and Rogoff (1996): Foundations of International Macro, MIT Press. Slides (and other stuff): Professor Dr. Holger Strulik Open Economy Macro 2 / 36

3 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 Professor Dr. Holger Strulik Open Economy Macro 3 / 36

4 1. The Current Account and Global Imbalances All international transactions of a country are recorded in the balance of payments 2 parts: Current account (CA): net exports of goods and services plus international payments of income Financial account (FA): sales of assets to foreigners minus purchases of assets from foreigners standards of book-keeping (double-entry): fundamental balance of payments identity: CA FA Professor Dr. Holger Strulik Open Economy Macro 4 / 36

5 The Current Account. CA consists of: Trade balance (TB) merchandize trade balance plus services balance Income Balance (IB): net investment income (NII) plus net international compensation of employees Net unilateral transfers (UT): remittances, grants, aid Thus: Capital account (capital transfers due to debt forgiveness, migration, international insurance etc.): This component is ignored in the exposition because it is not substantial for most countries CA TB + IB + UT Professor Dr. Holger Strulik Open Economy Macro 5 / 36

6 Financial account: (plus) Net increase of foreign-owned assets from home: foreign purchases and sales of home securities; home borrowing of foreign banks; foreign direct investment at home (minus) Net increase of home-owned assets from abroad: home purchases and sales of foreign securities; home bank lending to foreigners; home direct investment abroad Professor Dr. Holger Strulik Open Economy Macro 6 / 36

7 The U.S. Balance-of-Payments Accounts in 2014 Billions Percentage Item of dollars of GDP Current Account Trade Balance Balance on Goods Balance on Services Income Balance Net Investment Income Compensation of Employees Net Unilateral Transfers Private Transfers U.S. Government Transfers Source: Bureau of Economic Analysis, Professor Dr. Holger Strulik Open Economy Macro 7 / 36

8 and for us... Source: Bundesbank: Statistiken/Aussenwirtschaft/Zahlungsbilanz/zahlungsbilanz.html Professor Dr. Holger Strulik Open Economy Macro 8 / 36

9 Mio Leistungsbilanz Warenhandel (fob/fob) 1) Dienstleistungen (fob/fob) 3) Primäreinkommen Sekundäreinkommen darunter: Ergänzungen zum Außenhandel, Ausfuhr Einfuhr Saldo Saldo 2) Einnahmen Ausgaben Saldo Einnahmen Ausgaben Saldo Einnahmen Ausgaben Saldo Zeit Professor Dr. Holger Strulik Open Economy Macro 9 / 36

10 Kapitalbilanz (Zunahme an Nettoauslandsvermögen: + / Abnahme an Nettoauslandsvermögen: -) Saldo des übrigen Kapitalverkehrs darunter: Saldo Saldo der der Finanz- Langfristige Kurzfristige statistisch Saldo der derivate und Kredite der Kredite der nicht Saldo der Vermögens- Saldo der Saldo der Mitarbeiter- Monetären Monetären aufglieder- Leistungs- änderungs- Direkt- Wertpapier- aktien- Finanz- Finanz- Währungs- Saldo der baren Transbilanz bilanz 4) investitionen anlagen optionen Insgesamt institute 5) 6) institute 6) 7) reserven Kapitalbilanz aktionen 8) Zeit Professor Dr. Holger Strulik Open Economy Macro 10 / 36

11 And in % of GDP: GDP 2015: 3460 billion trade balance = 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... Professor Dr. Holger Strulik Open Economy Macro 11 / 36

12 country current account in % of GDP Professor Dr. Holger Strulik Open Economy Macro 12 / 36

13 15 TB and CA in 2005 for selected countries 10 5 China 100 CA/GDP 0 Philippines Mex Arg Ire 5 USA o TB/GDP Professor Dr. Holger Strulik Open Economy Macro 13 / 36

14 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 Ireland Philippines United States Argentina: Trade balance surplus but negative income balance due to interest payments on foreign debt. Ireland: Large trade balance surplus but even larger income balance deficit (due to huge capital inflows in the 1980s and 1990s Ireland has to pay income on its large external obligations). Philippines: Trade balance deficit but large positive UT due to remittances from abroad Professor Dr. Holger Strulik Open Economy Macro 14 / 36

15 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... Professor Dr. Holger Strulik Open Economy Macro 15 / 36

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18 Source: Eurostat Professor Dr. Holger Strulik Open Economy Macro 18 / 36

19 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 home country and home asset holdings by foreigners reflects a country s net borrowing needs (whether a country is a debtor or a creditor) Thus NIIP = CA + VC, VC: valuation changes, e.g. due to currency appreciations/depreciations Professor Dr. Holger Strulik Open Economy Macro 19 / 36

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21 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 NIIP 2014 = NIIP CA CA CA 2014 hypothetical NIIP: $ 9.9 trillion (57% of GDP) actual NIIP: $ 6.9 trillion (40 % of GDP) Professor Dr. Holger Strulik Open Economy Macro 21 / 36

22 The U.S. NIIP and the Hypothetical NIIP Since 1976 (billions of dollars) Actual NIIP Billions of dollars 4000 Hypothetical NIIP Year In 2015 foreign investors owned 20% of US stocks and 43% of US bonds. Professor Dr. Holger Strulik Open Economy Macro 22 / 36

23 Chapter 1. Introduction The Balance of Payments Cumulative Current Account Balances Around the World: , billions of U.S. dollars 2012, billions of U.S. dollars. Professor Dr. Holger Strulik Open Economy Macro 23 / 36

24 Big lenders: Oil exporting countries: Russia, Middle East, Norway, Venezuela China, Japan, Germany Big borrowers: USA, Southern Europe, Turkey, Brazil, Great Britain, Australia Are these global imbalances sustainable? What happens if the answer is negative? Professor Dr. Holger Strulik Open Economy Macro 24 / 36

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27 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 also negative Yet... Professor Dr. Holger Strulik Open Economy Macro 27 / 36

28 300 Negative NIIP: A Paradox? US Net Investment Income, $bn US NIIP, $bn Year 8000 Professor Dr. Holger Strulik Open Economy Macro 28 / 36

29 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 extra income on top of the amount of dollars invested Professor Dr. Holger Strulik Open Economy Macro 29 / 36

30 How large would Dark Matter be? In this case true NIIP (TNIIP): where DM is Dark Matter. Then TNIIP = NIIP + DM, TNIIP = NII /r. From Table slide 7: NII= 247 billion $. For an interest rate r of 5% this would be TNIIP = 0.247/0.05 = 4.9 trillion $. The measured NIIP is -5.3 trillion Dark Matter 10.2 trillion $!!! Professor Dr. Holger Strulik Open Economy Macro 30 / 36

31 Potential Explanation 2: Differential Rate of Return. suppose: rate of return of foreign investors on US assets is lower than the rate of return of US investors on foreign assets e.g.: foreigners hold low risk assets (US Treasury Bills), while US investors hold more risky foreign stocks with relatively higher returns Thus NII = r A A r L L, A:gross assets; L: gross liabilities In 2014: NII: $ 0.25 trillion; L = 31.6 trillion $; A = 24.7 trillion $. Take r L = 0.125%, the interest rate on one-year Treasury securities r A = 0.84%, a spread (risk premium) of about 0.7% empirically more plausible than 10.2 trillion $ of Dark Matter. End of Excursion Professor Dr. Holger Strulik Open Economy Macro 31 / 36

32 Current Account Sustainability 1. Is a Perpetual TB Deficit Possible? Then Suppose: 2 periods B 1 : NIIP of the home country at the end of period 1, NII 1 = rb 0. Suppose: no international labor income, no unilateral transfers, no value changes Eliminate B 1 : CA 1 = B 1 B 0 = rb 0 + TB 1 B 1 = (1 + r)b 0 + TB 1 B 2 = (1 + r)b 1 + TB 2 B 2 = (1 + r)[(1 + r)b 0 + TB 1 ] + TB 2 (1 + r)b 0 = B r TB 1 TB r Professor Dr. Holger Strulik Open Economy Macro 32 / 36

33 No-Ponzi-Game Condition: B 2 0, End (Transversality) Condition: B 2 0 This leads to B 2 = 0 and (1 + r)b 0 = TB 1 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 in the future a country can run a perpetual TB deficit if its initial NIIP is positive. Professor Dr. Holger Strulik Open Economy Macro 33 / 36

34 2. Is a Perpetual CA Deficit Possible? Recall: B 1 B 0 = CA 1 and B 2 B 1 = CA 2. Eliminating B 1 and using B 2 = 0, we get B 2 (CA 1 + B 0 ) = CA 2 B 0 = CA 1 CA 2 Initial NIIP must equal the sum of its CA deficits Negative initial NIIP has to be repaid by at least one positive future CA surplus such that (CA 1 + CA 2 > 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 grow at 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 a growing economy, otherwise the required TB surplus would exceed its GDP at some point. Professor Dr. Holger Strulik Open Economy Macro 34 / 36

35 Useful Accounting Identities: Savings, Investment, and the Current Account. Recall Thus CA t = Bt Bt 1 (in the absence of valuation changes), CA t = TB t + rbt 1 = X t IM t + rbt 1, Q t = C t + I t + G t + X t IM t. TB t = Q t C t I t G t CA t = rb t 1 + Q t C t I t G t. in which Q t is GDP and Y t = Q t + rbt 1 is national income (GNP). This provides CA t = Y t C t I t G t. (1) Professor Dr. Holger Strulik Open Economy Macro 35 / 36

36 Define National Savings: S t = Y t C t G t. Thus CA t = S t I t Define Domestic Absorption: A t = C t + I t + G t. Thus CA t = Y t A t To summarize, we have 4 alternative expressions for the current account: CA t = Bt Bt 1 CA t = rbt 1 + TB CA t = S t I t CA t = Y t A t Professor Dr. Holger Strulik Open Economy Macro 36 / 36