Lecture 1. Global Imbalances

Transcription

1 Lecture 1 Global Imbalances Saverio Simonelli University of Naples Federico II Fall 2017 International Macroeconomics

2 Practical information Meeting: Monday, Tuesday and Wednesday, 10:15-12:00 Room: Dipartimento, D20 Office hours: Monday 15:00-16:00 Lecture 1 International Macroeconomics 2 / 47

3 Topics of the Course Current account Exchange rate determination International macroeconomic comovement Currency and banking crises Lecture 1 International Macroeconomics 3 / 47

4 Tentative Course Schedule Lecture 1 International Macroeconomics 4 / 47

5 This lecture What determines the size of a country s external debt? Why do countries borrow from abroad? Why are exports of goods and services larger or smaller than imports of goods and services? Can countries borrow forever? Lecture 1 International Macroeconomics 5 / 47

6 The Balance of Payments

7 Trade Balance Trade Balance measures the difference between exports of goods and services and imports of goods and services: Goods Balance = Exports of Goods - Imports of Goods Service Balance = Exports of Services - Import of Services Trade Balance = Goods Balance + Service Balance Lecture 1 International Macroeconomics 6 / 47

8 The U.S. Trade Balance in 2014 Exports of goods and services: $2.3 trillion Imports of goods and services: $2.8 trillion Trade balance = $2.3-$2.8 = -$0.5 trillion 2014 trade deficit was 2.9 percent of GDP Lecture 1 International Macroeconomics 7 / 47

9 The U.S. Trade Balance in 2014 Lecture 1 International Macroeconomics 8 / 47

10 The U.S. Trade Balance in 2014 Lecture 1 International Macroeconomics 9 / 47

11 The U.S. Trade Balance in 2014 The trade balance was practically nil between 1960 and the early 1980s Trade deficits grew steadyly, reaching 6 % of GDP before the great contraction of During the crisis the trade balance improve to around 3 % Lecture 1 International Macroeconomics 10 / 47

12 Case Study : US Current Account and China What are the implications of the rise of the Chinese economy for the US CA? A large part of US Trade deficit is accounted by Chinese imports In 2015 US trade balance with China was -$337 Billion! (1/3 of US deficit) In 1985 the same statistic was -$6 Million! In this sense, a main driver of the CA imbalance of the US is the rise of the Chinese economy Lecture 1 International Macroeconomics 11 / 47

13 Case Study : US Current Account and China Lecture 1 International Macroeconomics 12 / 47

14 The Income Balance The income balance measures the difference between incomes received from the rest of the world and incomes paid to the rest of the world Net income from capital is called Net Investment Income and consists of dividends, interest, profits, etc. Net income from labor is called Net International Payments to Employees and records earnings of U.S. residents temporarily employed abroad and compensation payments to foreigners temporarily working in the U.S Income Balance = Net Investment Income + Net International Payments To Employees Lecture 1 International Macroeconomics 13 / 47

15 Net Unilateral Transfers Net Unilateral Transfers keeps record of the difference between gifts received from the rest of the world and gifts given to the rest of the world These gifts can involve private agents or governments Net Unilateral Transfers = Private Remittances + Government Transfers Lecture 1 International Macroeconomics 14 / 47

16 The Current Account The Current Account is the sum of the Trade Balance, the Income Balance, and Net Unilateral Transfers Current Account = Trade Balance + Income Balance + Net Unilateral Transfers If the current account is negative, all other things equal, the net external debt of the country goes up, and if the current account is positive, the external debt falls Lecture 1 International Macroeconomics 15 / 47

17 The U.S. Balance-of-Payments Accounts in 2014 Lecture 1 International Macroeconomics 16 / 47

18 The U.S. Balance-of-Payments Accounts in 2014 In 2014, the United States ran a large current account deficit The bulk of the current account deficit is accounted for by a large trade balance deficit Net investment income is positive, which means that investments of U.S. residents in foreign assets paid more than the investments of foreign residents in U.S. assets Net International Payments to Employees was quite small Net Unilateral Transfers were negative, which means that the United States gave more gifts to the rest of the world than it received (remittances of immigrants in the U.S.) Lecture 1 International Macroeconomics 17 / 47

19 The U.S. Trade Balance and Current Account Lecture 1 International Macroeconomics 18 / 47

20 The U.S. Trade Balance and Current Account The bulk of the U.S. current account is the trade balance Lecture 1 International Macroeconomics 19 / 47

21 Trade Balances and Current Account Balances Across Countries in 2005 Lecture 1 International Macroeconomics 20 / 47

22 Trade Balances and Current Account Balances Across Countries in 2005 The figure shows the current account and the trade balance for different countries at one point in time Trade balances and current accounts comove closely across countries (close to the 45 o line) Some exceptions Lecture 1 International Macroeconomics 21 / 47

23 Trade Balances and Current Account Balances Across Countries in 2005 Lecture 1 International Macroeconomics 22 / 47

24 Trade Balances and Current Account Balances Across Countries in 2005 CA = TB + Income Balance + Net Unilateral Transfers Argentina: TB > CA > 0 because Income Balance < 0. It Is a net debtor so it pays interest to the rest of the world Ireland: TB > 0 > CA because Income Balance is large, -15.2% of GDP! large FDI in the 1990s now send profits aborad Philippines: TB < 0 < CA because Personal Remittances are 13% of GDP! Philipinos working in the Middle East and elsewhere sending money home Lecture 1 International Macroeconomics 23 / 47

25 The World Map of Current Account Balances Lecture 1 International Macroeconomics 24 / 47

26 The World Map of Current Account Balances The map reflects not the current account of countries in a particular year, but the accumulated current accounts between 1980 and 2012 The country with the biggest accumulated current account deficit (bright red) is the United States The countries that have been financing these deficits (green) are China, Japan, Germany, and oil exporting countries (Russia, members of OPEC, and Norway) Overall, the picture is one of unbalanced accumulated trade, with some countries running protracted current account deficits and others running protracted surpluses Lecture 1 International Macroeconomics 25 / 47

27 The Net International Investment Position

28 The Net International Investment Position (NIIP) NIIP = Difference between a country s foreign assets (A) and its foreign liabilities (L) NIIP = A-L = U.S.-owned foreign asset Foreign-own If the NIIP is negative, then the country has an external debt, and if the NIIP is positive, the country is a net creditor to the rest of the world Lecture 1 International Macroeconomics 26 / 47

29 The US Net International Investment Position (NIIP) Lecture 1 International Macroeconomics 27 / 47

30 The US Net International Investment Position (NIIP) Lecture 1 International Macroeconomics 28 / 47

31 Valuation Changes NIIP = CA + valuation changes Valuation Changes: changes in the market value of the country s foreign asset and liability positions (due to currency appreciations or depreciations, changes in stock prices, etc.) Valuation changes have been an important source of movements in the NIIP of the United States, especially in the past two decades Lecture 1 International Macroeconomics 29 / 47

32 Valuation Changes Lecture 1 International Macroeconomics 30 / 47

33 Valuation Changes Lecture 1 International Macroeconomics 31 / 47

34 Valuation Changes Lecture 1 International Macroeconomics 32 / 47

35 Valuation Changes The Pre-Crisis Period: In spite of large CA deficits, the U.S. reduced its external debt. How did this happen? Large depreciation of the U.S. dollar (20%). Most of the U.S. foreign liabilities are in dollars, whereas most of the U.S. holdings of foreign assets are in foreign currency Large gains from stock market: $1 invested in foreign stock markets in 2002 returned $3 by 2007, whereas $1 invested in the U.S. stock market in 2002 yielded $2 in 2007 Lecture 1 International Macroeconomics 33 / 47

36 The Negative-NIIP & Positive-NII Paradox

37 The Negative-NIIP & Positive-NII Paradox Even though the U.S. is the largest external debtor in the world, it receives investment income from the rest of the world At the end of 2014, the U.S. net international investment position stood at $-7.0 trillion, and its net investment income was $+0.25 trillion How can this paradoxical situation happen? Two suggested explanations: Dark Matter and Return Differentials Lecture 1 International Macroeconomics 34 / 47

38 The Negative-NIIP & Positive-NII Paradox Lecture 1 International Macroeconomics 35 / 47

39 Explaining the NII-NIIP Paradox: (I) Dark Matter The Dark Matter hypothesis maintains that in reality the U.S. net international investment position is positive, but that the Bureau of Economic Analysis fails to account for all of it Assuming this theory is valid, how much dark matter is there in the NIIP? NII = r TNIIP, where TNIIP = the true net international investment position Assuming r equals to 5% per year and solving for TNIIP: TNIIP = NII/r = 0.25/0.05 = 5 trillion dollars Dark Matter = TNIIP - NIIP = 5 - (-7.0) = 12 trillion dollars! Lecture 1 International Macroeconomics 36 / 47

40 Explaining the NII-NIIP Paradox(II): Return Differential The gross international asset position of the U.S. is mostly composed of risky but high-return assets, whereas its gross international liability position is composed of safer low-return assets How large does the interest rate differential on assets and liabilities,r A r L, have to be to explain the paradox? NII = r A A - r L L Lecture 1 International Macroeconomics 37 / 47

41 Explaining the NII-NIIP Paradox(II): Return Differential In 2014, the U.S. gross international asset position was $25 trillion, and its gross international liability position was $32 trillion The average real rate of return on U.S. T-bills, which we will use as a proxy for rl, was 0.13% per year NII was $25 billion r A = (NII +r L L)/A = ( )/25 = That is, r A = 1.17%, or an interest rate differential between the U.S. foreign assets and liabilities of 1.04% per year Lecture 1 International Macroeconomics 38 / 47

42 Perpetual Trade Balance Deficit Can a Country Run a Perpetual Trade Balance Deficit? If it is a net debtor, then the answer is not. The country will have to run a trade balance surplus at some point to service its debt If the country is a net creditor of the rest of the world, then it can run a perpetual trade deficit and finance it with the interest generated by its net investments abroad Lecture 1 International Macroeconomics 39 / 47

43 Perpetual Trade Balance Deficit Consider an economy that lasts for two periods. It starts period 1 with a net foreign asset position of B0. Let r denote the interest rate The country s net investment income in period 1 is given byrb 0. Let the trade balance be denoted TB 1. Then, the country s net international investment position at the end of period 1 is B 1 = (1 + r)b 0 +TB 1 A similar expression holds in period 2: B 2 = (1 + r)b 1 +TB 2 Now at the end of period 2, the country cannot hold assets or debts: B 2 = 0 Lecture 1 International Macroeconomics 40 / 47

44 Perpetual Trade Balance Deficit Combining the previous equations: (1 + r)b 0 = TB 1 TB 2 /(1 + r) which states that the net foreign asset position (including interest) equals the present discounted value of its future trade deficits If the country is a net debtor, B0 < 0, then it must run a trade balance surplus at some point However, if the country is a net creditor of the rest of the world, B0 > 0, then it can afford running trade deficits in both periods Lecture 1 International Macroeconomics 41 / 47

45 Perpetual Current Account Deficit Can a Country Run a Perpetual Current Account Deficit? Yes, provided the country s initial net foreign asset position is positive In the absence of valuation changes, the change in the NIIP is the current account: CA 1 = B 1 B 0 and CA 2 = B 2 B 1 Lecture 1 International Macroeconomics 42 / 47

46 Perpetual Current Account Deficit Combining these two expressions to eliminate B1 that B2 = 0, we obtain B 0 = CA 1 CA 2 and recalling which implies that the country can run current account deficits in both periods only if the initial net asset position is positive This result holds for economies lasting any finite number of periods Lecture 1 International Macroeconomics 43 / 47

47 Savings, Investment, and the Current Account In any period, say period 1, savings, investment, and the current account are linked by the identity CA 1 = S 1 I 1 Savings in excess of what is needed to finance domestic investment must be allocated to purchases of foreign assets But the change in the net foreign asset position is precisely the current account Lecture 1 International Macroeconomics 44 / 47

48 Savings, Investment, and the Current Account A country s aggregate supply of goods and services in any given period is the sum of gross domestic product (Q 1 ), and imports(im 1 ) The aggregate demand for goods and services is the sum of private consumption (C 1 ), government consumption (G 1 ), investment (I 1 ), and exports (X 1 ) Q 1 + IM 1 = C 1 + G 1 + I 1 + X 1 Lecture 1 International Macroeconomics 45 / 47

49 Savings, Investment, and the Current Account Now add net investment income (rb0 ) to both sides of the previous expression and recall that the trade balance is the difference between imports and exports, or TB 1 = X 1 IM 1, to get Q + rb 0 = C 1 + G 1 + I 1 + TB 1 + rb 0 The sum of GDP and net investment income is known as National Income, denoted Y 1 Lecture 1 International Macroeconomics 46 / 47

50 Savings, Investment, and the Current Account Recalling that the sum of net investment income and the trade balance is the current account, or CA 1 = rb 0 + TB 1 Thus, we can write Y 1 = C 1 + G 1 + I 1 + CA 1 The difference between national income and private and public consumption is national savings, or S 1 = Y 1 C 1 G 1 Combining this expression with the one above, we get the expression we were looking for CA 1 = S 1 I 1 Lecture 1 International Macroeconomics 47 / 47