International Monetary Economics

Transcription

1 International Monetary Economics Lecture 2: Global Imbalances Master d Affaires Publiques SciencesPo Spring 2013 Pierre-Olivier Gourinchas

2 Roadmap The Intertemporal Approach to the Current Account The determinants of S, I and the CA (Metzler diagram) The Intertemporal External Balance The Intertemporal External Balance condition Feldstein-Horioka Puzzle Global Imbalances The Savings Glut hypothesis Global Imbalances and the Crisis Slide 2-2

3 The determinants of Saving and Investment The determinants of private saving (S p ) Current disposable income (Q-T): Changes in expected future disposable income (Q e -T e )): Changes in Wealth: Slide 2-3

4 The determinants of private saving: The real interest rate (r): Three effects of an increase in r : Substitution effect Income effect Wealth effect Slide 2-4

5 The determinants of private saving (summary): Final representation: S p = S p (r, Q-T, Q e -T e, Wealth ) The determinants of government saving: S g = T-G The determinants of national saving: S = S (r, Q, T, G, Q e, T e, Wealth ) Slide 2-5

6 The determinants of private investment: Firms determine investment by comparing their capital stock to their desired capital stock (K ) Marginal Benefit of an additional unit of capital: User cost of an additional unit of capital: Desired capital is set so that: Marginal Benefit = User Cost. Investment is determined from desired capital K = K (1- δ) + I I = K K (1- δ) Slide 2-7

7 The determinants of investment (continued): I = K K (1- δ) Changes in the marginal product of capital An increase in expected productivity: An increase in corporate profits: Changes in the real interest rate Final representation: I = I( r, productivity, profit taxes, ) Slide 2-8

8 Figure 1: The Metzler diagram for a small open economy r S I I S S,I Slide 2-10

9 Figure 2: Using the model: The effect of a transitory shock to current income. r S I I S S,I Slide 2-11

10 Figure 3: Using the model: The effect of a permanent shock to income. r S I I S S,I Slide 2-13

11 Intertemporal External Balance Key insight: Ultimately, a country must repay the funds that it borrows from the rest of the world A country that borrows today (runs a current account deficit) will have to repay tomorrow (run a current account surplus) Derive an Intertemporal Budget Constraint that links resources today and resources tomorrow. C 1 + C 2 /(1+r) = Y 1 + Y 2 /(1+r) Slide 2-14

12 Figure 4: Intertemporal choice and the current account C 2 C 2 B Y 2 A In d iffe re n c e Curve Bud g e t line C 1 Y 1 C 1 Slide 2-16

13 Figure 5: The effect of a transitory shock Y 2,C 2 A Y 1 45 o Y 1 =C 1 Y 1,C 1 Slide 2-17

14 Figure 6: The effect of a permanent shock Y 2,C 2 A Y 1 45 o Y 1 =C 1 Y 1,C 1 Slide 2-20

15 Table 1: Case study (1): the first oil price shock, Developed Countries Nonoil Developing Countries OPEC Source: Sachs, J. The current account and macroeconomic adjustment, Brookings Papers on Economic Activity, 1981 Slide 2-22

16 Table 2: Case study (2): Wars and the Current Account. Japan, year Saving/GDP Investment/GDP CA/GDP Slide 2-23

17 The Feldstein-Horioka Puzzle In a closed economy, saving and investment are perfectly correlated since S = I. In an open economy, Domestic national saving are determined by preferences, income,. while investment is determined by the cost of capital. Saving and investment should be largely uncorrelated S = CA + I In 1980, Martin Feldstein and Charles Horioka observed instead that S/Y and I/Y are very correlated in a sample of OECD countries between 1960 and Slide 14-24

18 The Feldstein-Horioka Puzzle Figure 7: Average Saving and Investment Rates, , OECD TUR IRL USA PRT CAN ESP GRC AUS AUT FRA SWE ISL NOR FIN JPN NLDBEL ITA CHE saving rate, Slide 14-25

19 The Feldstein-Horioka Puzzle Conclusion: there isn t as much financial integration as one might think. Another way to express the puzzle: Current Account deficit/surpluses are small (so the correlation between S and I is large). Recently, the numbers have been coming down: evidence of stronger financial integration within the OECD. Caveats: not a very powerful test of financial integration! Many reasons why S and I can be correlated even with integrated markets. Slide 14-26

20 The Feldstein-Horioka Puzzle Figure 8: Average Saving and Investment Rates, , OECD PRT GRC NZL TUR GBR AUS CAN ESP ISL ITA USA IRLSWE AUT FRA FIN DNK BEL NLD NOR JPN CHE saving rate, Slide 14-27

21 Global Imbalances Figure 9: Global Imbalances: current account deficits/surpluses Slide 2-28

22 Global Imbalances Figure 10: The Two-country Metzler diagram. r r S S* I I* S*,I* S,I Slide 2-29

23 Global Imbalances Figure 11: Global Imbalances & the two-country Metzler diagram. r r S* S I* I S*,I* S,I Slide 2-30

24 Global Imbalances Figure 12: Greenspan s conundrum: world real interest rates Slide 2-31

25 Global Imbalances Global Imbalances and the Crisis Direct links Indirect Links Slide 2-32

26 Summary In a closed economy, the real interest rate adjusts such that S = I. In a small open economy, the real interest rate equals the world real interest rate and the CA reflects the response of National Saving and Private Intestment to macroeconomic shocks. According to the Intertemporal Approach, Transitory shocks lead to smoothing of consumption and a CA adjustment. Permanent shocks lead to adjustment of consumption and no change in CA Global Imbalances and the crisis Common products of more complex causes. Slide 2-33