Accumulation Of Foreign Assets Research Articles

Central banks’ interventions in exchange rate markets during the international gold standard: Italy 1880–1913

This article reconstructs the history of direct interventions in exchange rate markets performed by the leading Italian banks of issue: the Banca Nazionale until 1893, then the Banca d'Italia between 1894 and 1913. The article shows that this type of operation represented a constant and relevant commitment for both institutions; interventions were made in the bills and/or the bonds market, sometimes also in conjunction with increases in the discount rate. Although often successful in the initial stages, until 1904 institutional provisions severely constrained the accumulation of foreign assets in the banks’ portfolios therefore reducing the viability, and hence the overall effectiveness, of these interventions.

Cross-country variation in patience, persistent current account imbalances and the external wealth of nations

This paper is the first to utilize large-scale international surveys on economic preferences to examine the long-run relationships between patience, current accounts and external wealth. We find robust empirical evidence that countries with more patient individuals tend to run persistent current account surpluses, which in turn result in the accumulation of foreign assets. This theoretically plausible but empirically unexplored relationship holds true for euro area current account imbalances, global current account imbalances and net foreign asset positions worldwide. While the existing current account literature concentrates on proximate macroeconomic determinants, this paper’s extension of inferences from deep determinants (i.e., time preferences) to the distribution of external wealth of nations (i.e., net foreign asset positions) makes a unique contribution to the literature. Our finding showing that deep heterogeneities contribute to external imbalances suggests that the pattern of current account imbalances as well as the distribution of external wealth of nations might be very persistent.

International capital flows with safe assets accumulation

PurposeThe author studies the role of safe assets accumulation in shaping the pattern of international capital flows.Design/methodology/approachThe author combines a theoretical model and the empirical analysis. The model is a two-country open economy, while the evidence is based on a fixed-effect regression on a panel of 19 countries of the eurozone.FindingsIn an open two-country economy, a positive productivity shock raises both mean and variance of wealth accumulation rate, then, leading to a greater holding of safe assets for risk-sharing motivation. Upon financial integration, the shock can induce the outflows of net total capital. The evidence of 19 eurozone countries confirms the theory and also uncovers that the safe assets (bonds) are the dominant driver of cross-border capital flows within the eurozone.Research limitations/implicationsThe model can be extended to account for the impact of safe assets on the economic growth, then, analyzes the role of safe assets within financial globalization. Taking into account the impact of safe assets on the open-economy economic growth can be the next step to approach the issue.Practical implicationsThe paper also provides important policy implication. Since a higher productivity level can raise the outflows of net total capital through the accumulation of foreign safe assets, an economy needs to increase its supply of safe asset along with upgrading its domestic productivity level. This combination is important for the long-run capital accumulation and economic growth of an economy with an increasing path of the productivity level.Originality/valueThe paper seeks a balance between theory and evidence on international capital flows. Moreover, the paper bridges the gap between the literature on international capital flows and the literature on safe assets. And the paper also focuses on the economies of the eurozone.

The La Marca model revisited: Structuralist goodwin cycles with evolutionary supply side and balance of payments constraints

AbstractThis research is aimed at investigating the causes of volatility that affect middle‐income countries by studying the La Marca model. Drawing from the open‐economy Goodwin tradition, this model demonstrates that economic activity, income distribution and accumulation of foreign assets dynamically interact, resulting in a pattern of dampened cycles. The study consists in analyzing the characteristics of the model by initially imposing: (I) a constant real exchange rate; (II) a constant net external asset to capital ratio, which is in line with the balance of payments dominance theory and (III) a fixed income distribution. We then (IV) expand the original model by adding an evolutionary supply‐side in which productivity is at the center of the economic dynamic through international technology transfer and the Kaldor‐Verdoorn effect. The results show that (1) the model always converges. (2) The restrictions (I) and (II) remove the cyclical component of the model, which highlights a central difference between La Marca and the original Goodwin model. (3) Fixed income distribution leads to a monotonic trajectory that reduces oscillations. (4) The inclusion of productivity dynamics generates new sources of volatility in the relationship between productivity, capacity utilization and net external assets and is in line with the structuralist argument of structural fragility.

개방경제에서 인구구조 변화가 경상수지 및 대외자산 축적에 미치는 영향분석 및 정책적 시사점 (The Effects of Demographic Change on Current Account and Foreign Asset Accumulation)

Korean Abstract: 본 연구는 인구구조 변화가 경상수지 및 순대외자산에 미치는 중장기적 영향을 실증분석 및 이론모형을 통해 살펴본다. 인구구조는 경제가 발전함에 따라 ① 고출산율·고사망률 ② 고출산율·저사망률 ③ 저출산율·저사망률 3단계 전환기를 거치며, 진행 과정에서 인구 증가와 고령화가 발생한다. 한국은 기대수명 증가와 출산율의 급격한 감소로 인해 고령화가 세계에서 가장 빠르게 진행되고 있으며, 향후 노년부양률이 급격하게 증가할 것으로 전망된다. 한편 경상수지는 상품 및 서비스의 수출입에 따른 상품수지와 배당금, 이자 등 내국인의 해외투자와 외국인의 국내투자의 차이인 소득수지의 합이며, 그중 상품수지는 국내저축과 투자의 차이로 나타낼 수 있다. 인구구조의 변화는 가계의 소비·저축 의사결정 및 기업의 투자, 자본 축적에 영향을 미친다. 고령화에 따른 노년부양률 증가는 경제의 소비 유인을 증가시키고, 저축을 감소시켜 경상수지 적자 요인으로 작용할 수 있다. 3장 국가패널 분석 및 4장 세대간 중첩(OLG) 모형 분석 결과, 한국은 현재 높은 생산가능인구 비중이 지속적인 경상수지 흑자의 상당 부분을 설명하며, 고령화가 심화됨에 따라 인구구조가 경상수지 감소 요인으로 작용할 것으로 전망된다. UN의 2019년 세계인구전망을 사용하여 인구구조 변화가 경상수지에 미치는 영향을 예측해본 결과, 2030년대 이후 경상수지가 적자로 반전될 것으로 나타났다. 우리나라는 개방경제의 이점을 활용하여 높은 경제성장률을 지속한 끝에 선진국 대열에 진입하였다. 그러나 한국 원화는 국제적 호환성이 제한되어 있고 환율이 외환의 수급에 의하여 결정된다. 경상수지 적자가 지속될 경우 외환시장의 불안정성 및 금융위기의 배경으로 작용할 수 있으므로 이에 대한 대비가 필요하다. 우리나라는 수출 주도의 상품수지 흑자 중심 경상수지 구조를 가지고 있다. 이러한 경상수지 흑자는 미래 소비를 위한 해외 저축을 의미하며, 이는 순대외 자산 축적으로 귀결된다. 순대외자산은 배당, 이자 등의 소득수지로 경상수지흑자에 기여할 수 있다. 한국은 1998년 이후 지속적으로 경상수지 흑자를 유지하였음에도 불구하고 2014년에 순대외자산국에 진입하였다. 급격한 인구구조의 변화를 감안할 때 경상수지 흑자와 순대외자산 축적의 선순환 구조를 구축하는 것이 중요하다. English Abstract: This study investigates the long-term effects of demographic changes on current account and net foreign assets. Along with economic developments, there are three stages of the demographic changes; (1) high birth rate and high mortality rate, (2) high birth rate and low mortality rate, and (3) low birth rate and low mortality rate. Population growth and aging occur in the process. Korea is one of the countries that experienced the fastest demographic changes with increasing life expectancy and decreasing fertility rates in the world. The elderly support rate is also expected to increase rapidly. Meanwhile, the current account balance is the sum of trade balance (net export), and income balance, defined as the income difference between the foreign investment of residents and the domestic investment of foreigners. Trade balance can be interpreted as the difference between domestic saving and investment. Demographic changes can affect consumption and saving decisions of households and investment of firms. For example, aging can increase the incentives for the consumption of the economy and reduce savings, which could potentially lead to current account deficits. According to the results of the empirical analysis of Chapter 3 and overlapping generations (OLG) model of Chapter 4, Korea accounts for a large part of the current account surplus with a current high proportion of the working-age population, and it is expected to become the current account deficit with an aging population. Using the 2019 World Population Prospects of UN to predict the impact of demographic changes on the current account, the current account surplus of Korea will turn into deficit after the 2030s. Korea has become an advanced country by taking advantage of the open economy that helps to sustain high growth. However, the Korean Won has limited international compatibility, and its value is mainly determined by the supply and demand for foreign exchange. Once the current account turns into deficit, it may act as a background for the instability of the foreign exchange market and the financial crisis. The current account surplus of Korea mainly comes from the export- driven trade surplus. The current account surplus can be interpreted as foreign savings for future consumption, which is ultimately accumulated in a net foreign asset position. Net foreign assets can contribute to the current account surplus with income balances such as dividends and interest. Korea has maintained its current account surplus since 1998 but has entered the net foreign assets surplus country in 2014. Given the rapid demographic change, it is important to establish a virtuous cycle of current account surplus and net foreign asset accumulation.

On the Relationship between Domestic Saving and the Current Account: Evidence and Theory for Developing Countries

AbstractWe examine the relationship between domestic saving and the current account in developing countries. Our three main findings are that: (i) domestic saving has a small effect on the current account; (ii) domestic saving has a significant positive effect on the trade balance—this effect is much larger than the effect that domestic saving has on the current account; and (iii) domestic saving has a significant negative effect on net‐current transfers. We use countries in the SSA region during the period 1980‐2009 as a laboratory for an instrumental variables (IV) approach. The IV approach enables to obtain estimates of causal effects. Underlying the IV approach is the significant positive first‐stage response of domestic saving to plausibly exogenous annual rainfall: an unanticipated, transitory supply‐side shock. We construct a small open‐economy DSGE model with debt adjustment costs and endogenous current transfers to match the empirical findings. The model enables to examine the relationship between domestic saving and the current account for different types of shocks. An important message of our paper is that, for developing countries, estimates of the relationship between domestic saving and domestic investment are not informative for answering the question how domestic saving affects a country's accumulation of net foreign assets.

Foreign asset accumulation among emerging market economies: A case for coordination

We develop a two-sector, core-periphery country general equilibrium framework with endogenous financial crises to study foreign asset accumulation coordination among emerging market economies. Consistent with the policy prescription described by Bianchi (2011), we show that a national planner in each peripheral country prefers a higher asset position than the decentralized agents but may reduce welfare. A coordinator for all peripheral countries, who considers the general equilibrium effect of aggregate peripheral savings on the world interest rate, prefers a different asset position than the national planner. When we calibrate our model to a group of emerging Asian economies, the quantitative analysis shows that in the absence of coordination, national regulation leads to a 3.7% higher average net foreign asset position and a welfare loss relative to the laissez-faire. In contrast, the coordinated level of net foreign assets is 59% of the uncoordinated level and results in a sizable welfare gain.

On the Relationship Between Domestic Saving and the Current Account: Evidence and Theory for Developing Countries

We examine the relationship between domestic saving and the current account in developing countries. Our three main findings are that domestic saving has: (i) a small effect on the current account; (ii) a significant positive and quantitatively sizable effect on the trade balance; (iii) a significant negative effect on net-current transfers. We use countries in the sub-Saharan African region as a laboratory for an instrumental variables approach. The IV approach enables to obtain estimates of causal effects. Underlying the IV approach is the significant positive first-stage response of domestic saving to plausibly exogenous annual rainfall: an unanticipated, transitory supply-side shock. We construct a small open-economy DSGE model with debt adjustment frictions and endogenous net-current transfers to match the empirical findings. The model enables to examine how other types of shocks - such as changes in interest rates or trend TFP for which it is hard to get exogenous variation in the data - affect the relationship between domestic saving and the current account. An important implication of our findings is that, for developing countries, estimates of the relationship between domestic saving and domestic investment are not informative for answering the question how domestic saving affects a country's accumulation of net foreign assets.

Making International Financial Integration Work for Low-Saving Countries

Deeper financial integration is expected to enable low-saving countries to increase domestic investment but also to increase crisis risks by facilitating the accumulation of risky foreign liabilities. This paper explores the connections between financial integration, investment and crisis risk to assess this tradeoff. It confirms expectations but also finds that the accumulation of safe foreign assets that financial integration brings is an important risk offset that in many cases even eliminates the risk factor from the tradeoff altogether. Furthermore, it shows that the risk features of assets and liabilities depend on their type. Ultimately, whether international financial integration is in fact a reliable remedy for individual countries critically depends on the portfolio composition of their foreign assets and liabilities.

Trade Integration and the Trade Balance in China

We study China’s growth and integration (trade and financial) in a two-country DSGE model with a dynamic exporting decision, pricing-to-market, incomplete financial markets, and aggregate shocks to trade barriers, productivity, and preferences. We estimate the changes in technology, trade costs, and preferences accounting for the dynamics of China’s gross and net trade flows, export participation, real exchange rate, and growth from 1990 to 2014. We find a large unanticipated decline in bilateral trade barriers with persistent, but not permanent, innovations that include an important gradual, phased-in component. Since the Great Recession, average bilateral barriers have stabilized at low levels even as barriers on Chinese imports have risen substantially relative to exports. Trade stagnation since 2011 largely reflects the completed transition to past trade reforms rather than an increase in trade barriers or reversal in the expected pace of future integration. Trade is forecast to decline almost 1 percent per year starting in 2017. Changes in trade barriers are an important determinant of China’s trade balance and its accumulation of foreign assets, accounting for as much as 70 percent of the foreign assets accumulated by 2014. Shocks to trade barriers and in China are found to have increased ROW consumption by 11.9 percent and employment by 0.6 percent but lowered ROW output by less than 1 percent relative to 1990.

Penny wise and pound foolish? On the income from Germany’s foreign investments

Recently, Germany’s current account surpluses have been a cause of concern both in the public debate as well as in policy circles. Although accumulating net foreign assets appears reasonable against the background of population ageing, one of the criticisms that has been voiced repeatedly in this regard is that Germany’s savings are being squandered abroad. In order to disentangle the dynamics of the German investment income balance, we apply a novel decomposition framework to a rich German dataset spanning 11 different asset classes between 1999 and 2014. First, we show that Germany gained a yield privilege in this time period and that it would not have been more profitable to invest German savings in domestic assets. Second, the accumulation of net foreign assets accounted for 60% of the rise in the investment income balance. Third, the global decline in interest rates in the aftermath of the global financial crisis led to an appreciable dent in net investment income receipts, which leaves scope for a risk sharing interpretation.

Resource Funds: Stabilising, Parking, and Inter-generational Transfer

The paper explores strategies for managing revenue from natural resources, focusing on the balance between domestic and foreign asset accumulation. It suggests that domestic asset accumulation is the priority in developing countries, while there are three motives for accumulating foreign assets; inter-generational transfer, temporary ‘parking’ of funds, and stabilisation. The paper argues that the first of these is inappropriate for low income countries. The second is required if it is difficult to absorb extra spending in the domestic economy and takes time to build up domestic investment. The third is important, and depends on the extent to which the economy has other ways of adjusting to shocks.

A Welfare Analysis of 'New Mercantilist' Foreign Reserve Accumulation

Contrary to traditional neoclassical growth models, recent decades have seen a number of developing economies running sizable current account surpluses. In response to "new mercantilist" explanations of this phenomenon that relate holdings of foreign assets to higher levels of economic growth, this paper presents a theoretical model of a small open developing economy that permits a welfare analysis of mercantilist policies and importantly answers the question of whether mercantilist motives alone can explain the recent high levels of observed foreign asset holdings. Using a calibration to match the characteristics of China, the model predicts that while such policies may lead to significant welfare gains, consumers' desires to smooth consumption generally preclude a positive current account balance under most parameterizations. Deliberate foreign asset accumulation may be welfare reducing or mercantilist motives may provide only one component of a fuller explanation.

Foreign Asset Accumulation Among Emerging Market Economies: A Case for Coordination

We develop a two-sector, core-periphery country general equilibrium framework with endogenous financial crises and argue for coordination on foreign asset accumulations among emerging market economies (EMEs). We show that a national planner in each peripheral country prefers a higher foreign asset position than the decentralized agents. This is consistent with the policy prescription derived in Bianchi (2011). However, a coordinator for all peripheral countries, who internalizes the effect of aggregate peripheral savings on the world interest rate, prefers a lower foreign asset position relative to the national planner. We find that uncoordinated foreign asset accumulations may even be inferior to decentralized equilibrium once we allow for a variable world interest rate. Our quantitative analysis shows that the coordinated level of net foreign assets for the peripheral countries is only 56% that of the uncoordinated level.

Dominican Republic: Sectoral Financial Positions and Macroeconomic Vulnerabilities

This paper examines the financial position of the key sectors of the Dominican Republic. It contributes to macroeconomic surveillance by identifying financial interlinkages and vulnerabilities through the balance sheet approach. The balance sheet of the economy has been weakening, particularly in foreign currency, due to persistent fiscal deficits. Risks arising from weaker foreign currency position, however, seem to be mitigated by long-term maturities on government debt and increasing accumulation of foreign currency assets. Given the strong links of the rest of the economy with the public sector, network analysis suggests that while the financial position of the other sectors of the economy is stronger, they could be adversely affected in an external stress scenario. Exposures to public sector are particularly pronounced in the domestic financial system (directly) and households (indirectly, through pension funds).

Dominican Republic: Sectoral Financial Positions and Macroeconomic Vulnerabilities

This paper examines the financial position of the key sectors of the Dominican Republic. It contributes to macroeconomic surveillance by identifying financial interlinkages and vulnerabilities through the balance sheet approach. The balance sheet of the economy has been weakening, particularly in foreign currency, due to persistent fiscal deficits. Risks arising from weaker foreign currency position, however, seem to be mitigated by long-term maturities on government debt and increasing accumulation of foreign currency assets. Given the strong links of the rest of the economy with the public sector, network analysis suggests that while the financial position of the other sectors of the economy is stronger, they could be adversely affected in an external stress scenario. Exposures to public sector are particularly pronounced in the domestic financial system (directly) and households (indirectly, through pension funds).

Unbalanced Privatization in Emerging Economies and Capital Flows

This empirical study reveals that a higher credit distribution by State-Owned Banks (SOBs) to State-Owned Enterprises (SOEs), to the detriment of some highly productive private firms, has an effect on foreign investments in emerging countries experiencing an economic transition. A first approach relying on GMM, Bayesian techniques, and utilizing a sample of 40 emerging countries over the period 1987-2007, demonstrates that the capital misallocation created by SOBs during privatization hinders inward FDI and enhances the accumulation of foreign assets. Then, to specify the effect on FDI inflows, a sectoral approach is implemented for 1992-2012 and strengthens the results; the rise in the credit afforded to SOEs to the detriment of growing private firms is associated with a slowdown of inward FDI stocks by approximately 16% to 23% during privatization. This conclusion is valid in manufacturing but not in tertiary sectors, that is, in sectors with more private firms and external finance dependence. The literature on the Chinese case is partly extended to the main emerging privatizing countries. These results allow for improvement in policy actions to better allocate capital in transition economies and for international stability.

The Open‐Economy Trilemma in China: Monetary and Exchange‐Rate Policy Interaction under Financial Repression

AbstractThis paper models China's monetary‐cum‐exchange rate policy, in which sterilization measures insulate base money from the full effects of capital inflow while the accumulation of net foreign assets (NFAs) limits exchange‐rate appreciation. I find that the negative‐risk premium in the interest rate—which compensates NFA holders for exchange‐rate risk with a higher relative rate of return on their NFAs—plays a pivotal role in influencing the magnitude of sterilization and in inducing endogenous change in the exchange rate. I show that a feedback loop between the exchange rate and capital inflow exists in the form of a multiplier mechanism that jeopardizes both monetary autonomy and exchange‐rate stability. The findings testify to the open‐economy trilemma challenging the effectiveness and sustainability of China's monetary‐cum‐exchange rate policy and point to a flexible exchange rate as a solution that can enhance monetary sovereignty, reduce financial repression and improve economic efficiency.

Macroeconomic volatility and external imbalances

Does macroeconomic volatility/uncertainty affects accumulation of net foreign assets? In OECD economies over the period 1970–2012, changes in country specific aggregate volatility are, after controlling for a wide array of factors, significantly positively associated with net foreign asset position. A standard open economy model with time varying macroeconomic uncertainty can quantitatively account for this relationship. The key mechanism is precautionary motive: more uncertainty induces residents to save more, and higher savings are in part channeled into foreign assets. Data and theory suggest that volatility is an important determinant of the medium/long run evolution of external imbalances in developed countries.

Discussion of “Macroeconomic volatility and external imbalances” by Alessandra Fogli and Fabrizio Perri

This paper by Fogli and Perri investigates both theoretically and empirically the effects of volatility on net foreign asset accumulation. There are two key contributions. On the empirical side, the paper shows that countries that experienced higher volatility relative to other OECD countries accumulated on average more net foreign assets. On the theoretical side, the paper shows that a two country incomplete market model with time-varying volatility can account for this empirical relationship. The authors are addressing an important topic related to earlier discussions on global imbalances, which have become even more relevant in the context of the global financial crisis. In this comment, I review some of the main empirical and theoretical findings and provide some further thoughts about the broader implications of this paper for international macro.