Exorbitant Duty. Hélène Rey London Business School CEPR & NBER Nicolas Govillot Mines de Paris

Transcription

1 Exorbitant Privilege and Exorbitant Duty PO P.O. Gourinchas UC Berkeley, CEPR & NBER Hélène Rey London Business School CEPR & NBER Nicolas Govillot Mines de Paris

2 Research Agenda on balance sheet of countries and the International Monetary System International Financial Adjustment (2007) with Gourinchas From World Banker to World Venture Capitalist: The US External Adjustment t and the Exorbitant tprivilege il (2007) with Gourinchas Exorbitant Privilegeand Exorbitant Duty, withgourinchas and Govillot (200) The Financial Crisis and the Geography of Wealth Transfers with Gourinchas and Truempler (20) Reforming the InternationalMonetary System (20) with Farhi and Gourinchas

3 Three Important Facts on US External Accounts A World Banker s Balance Sheet Exorbitant Privilege in normal times Exorbitant Duty in crisis times 2 / 46

4 Exorbitant Privilege Modern meaning: (Gourinchas and Rey (2007)) Excess return of US external assets over US external liabilities. Important for long run sustainability (relaxes US intertemporal constraint). Stable external position despite trade deficits. Asymmetric external balance sheet: World Banker; First contribution: We update and revise earlier estimates. We reaffirm the existence of positive excess returns in good times. 4 / 46

5 Exorbitant Duty Second contribution: document a new stylized fact: Large US valuation losses in crisis times Transfers wealth from the US to the rest of the world. Precisely at times when the global marginal utility of consumption is high. Exorbitant Duty 6 / 46

6 A Theoretical Framework Third contribution: Model to make sense of these facts; Exorbitant Privilege and Exorbitant Duty are two sides of the same coin; President Roosevelt, undelivered Jefferson Day address, April, 945: Today we have learned in the agony of war that great power involves great responsibility. Leads to an alternative interpretation of the role of the center country in the International Financial System: global shocks risk appetite fiscal capacity 7 / 46

7 External Balance Sheet Updated and improved data set of From World Banker to World Venture Capitalist, 952Q to 2009Q4 Use historical data on positions (annual), flows (quarterly) and asset and asset price series for valuations. More detailed decomposition on liability side (corporate and government debt estimated separately) Use detailed wartime Treasury Surveys of cross border holdings (94, 943) to cross check our initial positions. Surveys of strategic importance (reparations, and identification of foreign agents) investigations to uncover enemy agents and enemy assets, especially after our entry into the war, were greatly facilitated by the [94 Treasury Census of foreign-owned assets in the US]. The [943 Treasury Census of American-owned assets in foreign countries] had its principal use in the war settlements, although it provided much greatly needed information during the latter part of the military phases of the war. Introduction to the 94 and 943 Surveys. 8 / 46

8 Methodology where P i t+ = P i t + F i t+ + V i t+ + OC i t+ P i t: Positions for assets i at the end of period t (BEA, FoF, surveys); F i t : gross financial flows during period t (Balance of Payments); V i t : Valuation gains or losses attributed to currency and local asset price movements; OC i t : Other changes reported by the BEA (in Q4); Reconciliation item. 9 / 46

9 20.00% 0.00% 0.00% % 0.00% % 20.00% 40.00% US Net Foreign Asset Position (% GDP) 50.00% 952Q 200Q % NA/GDP CumCA/GDP

10 US Gross Asset Position (percent of output) Gold Non Gold Debt Direct Investment Equity Source: BEA, SCB, Treasury Surveys, and authors calculations / 46

11 US Gross Liabilities Position (percent of output) Other Government Debt Corporate Debt Direct Investment Equity Source: BEA, SCB, Treasury Surveys, and authors calculations 2 / 46

12 Leveraged Balance Sheet Asymmetric external balance Sheet (a) in terms of asset classes (debt and bank loans on liability side are large; FDI and equity on asset side are large) (b) in terms of currencies (liabilities in dollars, assets in foreign currencies)...like a bank, US external position is leveraged. 4 / 46

13 Exorbitant Privilege Gourinchas & Rey (2007) documented excess returns on US external assets of 3.32% for Composition effect (equity premium across asset classes) but also excess return within asset class; Measuring returns R i t+ = Pi t + I i t+ + V i t+ P i t where Rt+ i return on asset class i between t and t + ; It+ i investment income in t + ; Vt+ i valuation gain or losses in t + ; 5 / 46

14 Recent Literature on Exorbitant Privilege Obfsteld & Rogoff (2005): 3.% for Lane & Milesi Ferretti (2007): 3.9% for Curcuru, Dvorack & Warnock (2008): 0.72% for Forbes (2008): 6.9% using Curcuru et al (2008) s methodology for Issue? P i t+ = P i t + F i t+ + V i t+ + OC i t+ How to treat OC t? mismeasured capital gain, financial flows, or initial position? 6 / 46

15 Returns on External Position Different estimates reflect different assumption about Other Changes : Mismeasured capital gains (Gourinchas and Rey (2007)) R i t+ = Pi t + I i t+ + V i t+ + OC i t+ P i t Mismeasured capital flows (Curcuru et al, Lane and Milesi-Ferretti (2009)) Mismeasured initial positions R i t+ = Pi t + I i t+ + V i t+ P i t NX t = NX t + OC t Rt+ i = P i t + I i t+ + V i t+ P i t P i t = Pt i OCt+ i + ( I i t+ + Vt+) i /P i t+ 7 / 46

16 US Gross External Returns average returns 952:-2009:4 952:-972:4 973:-2009:4 (a) : Valuations r a r l 2.69%.30% 3.47% r a 5.84% 5.04% 6.30% r l 3.6% 3.74% 2.83% (b) : Financial Flows r a r l.49%.25%.62% r a 4.9% 4.7% 5.02% r l 3.42% 3.46% 3.40% (c) : Mixed r a r l 2.44%.28% 3.% r a 5.76% 4.96% 6.2% r l 3.3% 3.68% 3.% Table: Panel (a): Other changes allocated to valuations; Panel (b): to financial flows; Panel (c): to valuations, except for debt assets and liabilities. r a refers to gross assets, r l to gross liabilities. Annualized quarterly real returns. 8 / 46

17 Excess Returns by Asset Class r o r d r di r e (a) : valuations 952:-2009:4-0.63% 4.7% 4.00% 4.% 952:-972:4-2.02% 4.79% 2.24% 3.96% 973:-2009:4 0.6% 4.67% 4.99% 4.9% (b) : financial flows 952:-2009:4 -.37% 3.0%.99% 2.09% 952:-972:4-2.2% 3.98% 2.24% 3.59% 973:-2009:4-0.94% 2.45%.85%.23% (c) : mixed 952:-2009:4-0.63% 3.0% 4.00% 4.% 952:-972:4-2.02% 3.98% 2.24% 3.96% 973:-2009:4 0.6% 2.45% 4.99% 4.9% Table: Panel (a): Other changes allocated to valuations; Panel (b): to financial flows; Panel (c): to valuations, except for debt assets and liabilities. r o refers to the other assets ; r d to debt ; r di to direct investment and r e to equities. Annualized quarterly real excess returns. 9 / 46

18 Volatility of Returns Std. Dev. 952:-2009:4 952:-972:4 973:-2009:4 r a r l 3.22% 2.8% 3.57% r a 4.% 2.4% 4.82% r l 3.4% 3.8% 3.24% Table: Standard Deviation of Quarterly Returns. The table reports the quarterly standard deviation of total returns on gross external assets and liabilities.r a refers to the total return on gross assets, r l to the total return on gross liabilities. Other changes are allocated to valuations 20 / 46

19 Exorbitant Privilege Excess returns between.62% and 3.4% p.a. After 973, flexible exchange rate system. Higher return and higher volatility. Even with the Curcuru et al correction, we find large excess returns since 973. Why? Important to look at long periods. 2 / 46

20 Real Quarterly Returns on US Gross Assets and Liabilities 5% 0% 5% 0% -5% -0% -5% -20% Liabilities Assets Quarterly returns deflated by US Personal Consumption Expenditure deflator. Source: BEA, SCB, Treasury Surveys, and authors calculations. 22 / 46

21 Source of the Exorbitant Privilege Composition effect (World Banker) Return differential Direct Investment: (a) life-cycle; (b) asymmetric taxation and transfer pricing Equity: (a) true return on equity not observed. Index returns may be a poor proxy. (b) intra-month trading Debt: (a) statistical asymmetry in BEA (assets are LT only, liabilities are LT and ST); (b) maturity asymmetry. Treasury reports show longer maturity for assets; (c) intra-month trading 23 / 46

22 US Net Foreign Asset Position (percent of output) Source: BEA, SCB, Treasury Surveys, and authors calculations 24 / 46

23 Exorbitant Duty During latest crisis, US net foreign asset position deteriorated massively Between 2007:4 and 2009:, NA drops from USD -.6tr to USD -4.29tr, a decline of USD 2.7tr Over same period, cumulated current account represents -809bn, Valuation loss of USD.9tr, or about 3.4% of US GDP, 25 / 46

24 U.S. External Debt and Equity, percent of US GDP Debt Liabilities Equity Liabilities Debt Assets Equity Assets Source: BEA, SCB, Treasury Surveys, and authors calculations 26 / 46

25

26 Not only in this crisis: co movement of VIX & NA/GDP vix nagdp

27 VIX and NA/GDP nagdp vagdp nagdp vagdp 962:2-2009:4 990:-2009:4 VIX (.) (.02) (.09) (.03) c (2.) (.36) (2.) (.70) N Adj. R Table: Exorbitant Duty over Time. The table reports the results from an OLS regression of the U.S. net foreign asset position relative to GDP (nagdp) on the VIX index extended before 986 with the volatility of the MSCI-ex US index. vagdp refers to the valuation component (relative to GDP) defined as V t = NA t NA t F t where F t represents net financial flows in period t. 28 / 46

28 Exorbitant Duty Deterioration also present to a smaller degree in earlier episodes Worsening of US net foreign asset position occurs largely through a valuation loss: risky assets collapse, while US government debt increases in value. This valuation loss transfers wealth from the US to the rest of the world. US provides a transfer at times when the marginal utility of consumption is high. We interpret the exorbitant duty as an insurance payment and the exorbitant privilege as the corresponding insurance premium. 29 / 46

29 Bilateral heatmap of gains and losses In millions of US dollars: bilateral valuations gains and losses on external positions: equity

30 Bilateral heatmap of gains and losses In millions of US dollars: bilateral valuations gains and losses on external positions: debt

31 Bilateral heatmap of gains and losses In millions of US dollars: bilateral valuations gains and losses on external positions: FDI

32 Correlations dollar shortage and ABCP Office level( dash upper) Group level (dash ) abcp2007 0

33 ABCP and losses on debt rate of loss on debt assets share of ABCP in debt assets Canada Euro Area Japan Other Advanced Switzerland United Kingdom

34 A Simple Model of Insurance Provision 2 countries, Home (US) and Foreign ( ), equal size /2. Endowment economy: y t, y t. Global output ȳ t iid. Representative household with CRRA preferences: E t s=t βt ct σ / ( σ), US has more tolerance for risk: σ < σ (interpreted broadly as access to technology to reduce risk) Markets are complete. 30 / 46

35 A Simple Model Ex-ante symmetric equilibrium: c 2 Eȳ + ( c 2 Eȳ ) σ/σ = ȳ Eȳ. US insures foreign against bad times. US implements allocation with equity holdings of σ / (σ + σ ) > /2: leveraged external portfolio Autarky risk-free interest rate (w/output log-linearly distributed, variance σ 2 ɛ ) E ln R aut t = ln β σ2 2 σ2 ɛ. lower autarky interest rate abroad since σ > σ due to precautionary saving (Mendoza et al (2009); Caballero, Farhi & Gourinchas (2008)) US runs trade deficit 3 / 46

36 Risk Sharing with Heterogenous Risk Aversion The figure is drawn under the following assumptions: Eȳ =, σ = 2, σ = / 46

37 A Simple Model Ex-ante symmetric equilibrium: c 2 Eȳ + ( c 2 Eȳ ) σ/σ = ȳ Eȳ. US insures foreign against bad times. US implements allocation with equity holdings of σ / (σ + σ ) > /2: leveraged external portfolio Autarky risk-free interest rate (w/output log-linearly distributed, variance σ 2 ɛ ) E ln R aut t = ln β σ2 2 σ2 ɛ. lower autarky interest rate abroad since σ > σ due to precautionary saving (Mendoza et al (2009); Caballero, Farhi & Gourinchas (2008)) US runs trade deficit 33 / 46

38 A Model of Global Disasters and Insurance Simple model is too stylized single good, so no difference in risk-free returns symmetric size no episodes of global stress Richer model includes: multiple goods (traded and non-traded) (Hassan (2009)) differences in size (Hassan (2009)) global disaster risk (Barro (2006) and Rietz (988)) differences in fiscal capacity (size) 34 / 46

39 A Model of Global Disasters and Insurance 2 countries, Home (US) and Foreign ( ), home size α. Endowment economy: yt T, yt T traded, yt N, yt N non traded. Global output of traded good ȳt T = αy T + ( α)y T. Representative household with CRRA preferences and σ σ : E t s=t β t c σ t / ( σ), CES preferences over T and N consumption: c = [γ /θ ( c T ) θ θ ( ] + ( γ) /θ N)θ θ θ θ c Resource constraints: c N = y N and αc T + ( α)c T = ȳ T Markets are complete internationally. 35 / 46

40 Characterization with CM, marginal utility of consumptions proportional: ( ) c (/θ σ) /θ ( ) t ct T κ /θ = c (/θ σ ) /θ t ct T, inter and intra-temporal elasticities of substitution: σ > /θ: T and N gross substitutes. σ < /θ: T and N gross complements σ = /θ: T and N separable price of domestic non-traded good: ( ) γy N /θ q t = t ( γ) ct T common stochastic discount factor s.t. E t [M t,t+ R t+ ] = M t,t+ = β ( ) ct+ c t θ σ ( c T t+ c T t ) /θ 36 / 46

41 Characterization Rewrite risk sharing condition as c T = xc T with ( γ ( /θ ȳ T / [α + ( α) x] ) θ θ + ( γ) /θ ( y N) θ θ ( x κ ) θ θ = (γ /θ (xȳ T / [α + ( α) x]) θ θ ) σθ ) + ( γ) /θ (y N ) θ σ θ θ when σ σ > /θ A decline in y N raises c T (fall in x) A decline in ȳ T decreases c T when σ < σ (increase in x) A decline in y N decreases c T (increase in x) if endowments are stationary, so are consumptions: x = x (y; κ) solve for κ such that there are no initial net foreign asset positions. Implement with two assets (approximate): a global equity (claim to world endowment) and a domestic real bond (pays the US CPI next period). Use the approximate portfolio to construct gross assets and liabilities. 37 / 46

42 Business Cycles and Disasters Output Process: ln y T t = ln (γ) + ɛ T t + v t ln y N t = ln ( γ) + ɛ N t + v t ɛ i iid log-normal, sector & country specific; v t is a stationary Barro-Rietz process: with probability p d output falls by ( b) across sectors and countries. with probability p n output recovers Fiscal capacity: recovery rate r on government bonds may differ across countries during disasters: r > r. 39 / 46

43 Analytical Results w/o Disasters Excess return between two assets: ln E t Rt+ f ln E t Rt+ f ( = cov t ( ˆm t,t+, ˆp t+ ) cov t ˆmt,t+, ˆp t+ ) ( = ( γ) cov t ˆmt,t+, ˆq t+ ˆq t+), Exorbitant privilege if times of relative scarcity ( ˆm > 0) are times of real appreciation (ˆq > ˆq ) log-linearizing the model: ln E tr f t+ ln E tr f t+ = (( γ) / [ + (σθ ) γ ( α) + (σ θ ) γα]) 2 σ 2 ɛ θ [ γ(σ σ) ( + (σθ ) γ) ( + (σ θ ) γ) / ( γ) +α (σθ ) ( + (σ θ ) γ) (σ + (σ σ) γα) ( α) (σ θ ) ( + (σθ ) γ) (σ (σ σ) γ ( α))]. 40 / 46

44 Analytical Results w/o Disasters domestic bond is a poor hedge against: shocks to traded output shocks to foreign non-traded output In both cases, risk sharing requires a decline in c T, so a decline in q and P. domestic bond is a good hedge against shocks to domestic non-traded good. in the large (alpha = ), symmetric (σ = σ ) country limit, only shocks to domestic non-traded good matter (Hassan (2009)) 4 / 46

45 Calibration Parameters: γ: Share of traded goods θ: (el. of subst. b/w T and N) σ: 3 (so goods are gross substitutes) σɛ 2 : 0.02 (bus. cycle shocks) p d :.7% cond. prob. of disaster (from Barro (2006)) p n : 2% cond. prob. of recovery b: 0.42 collapse in output in disaster (from Barro (2006)) r : 0.75 foreign recovery rate 42 / 46

46 Model Simulation Parameters () (2) (3) (4) α θ σ b r 0.75 Equity Premium (n.) (percent) (d.) T-bill excess return (n.) (percent) (d.) NA excess return (n.) (percent) (d.) Trade Balance (n.) (% of output) (d.) Net Foreign Assets (n.) (% of output) (d.) Net Debt Liabilities (n.) (% of output) (d.) / 46

47 Equilibrium Allocations and Expected Returns Allocations reallocation of traded goods towards foreign when disaster strikes US runs trade deficit in normal times, yet NA position is stable. Small excess return on assets over liabilities (but leveraged). ( exorbitant privilege ) implements allocation with leveraged portfolio. Collapse in equity values during disaster implies a decline in valuation (NA drops). ( exorbitant duty ) Excess returns on debt relative price of nontraded good q: q t /qt = ( ) x t yt N /yt N /θ domestic real bond delivers highs payoff when q is high fall in ȳ T or y N : transfer to foreign, decrease in q/q ; US real bond not a good hedge fall in y N : increase in q/q ; transfer to home, US bond is a good hedge Overall, foreign bonds has lower yield. No within class excess return Result is reversed if foreign has a lower fiscal capacity. 45 / 46

48 Conclusion Three stylized facts: World Banker Exorbitant privilege Exorbitant duty Our simple model accounts broadly for these facts. Interprets the US as provider of insurance against global shocks. Model emphasizes the role of: greater risk appetite in US (capacity to handle risk) disaster risk (important for wealth transfers) fiscal capacity (important for risk free debt return) Model does not account for large net borrower position of the US in good times. One interesting possibility: the role of pecuniary externalities in incomplete market models: foreign countries accumulate too much reserves, and the US accumulates too much debt; Suggests that the US may face a Triffin-like problem as the demand for insurance may eventually exceed it s fiscal capacity. 46 / 46