Net Foreign Assets Research Articles

Determinants of Turkish real effective exchange rates

Widening current account deficits went hand in hand with considerable volatility, and financial fragility for last three decades. Within these circumstances, Turkish Lira has been exposed to huge oscillations from time to time. These kind of substantial ups and downs raise the questions on the persistency of equilibrium exchange rates for TL. This paper aims to assess the long run equilibrium path for Turkish Lira and its fundamental determinants. Empirical investigation suggests that the main fundamental determinants of Turkish real effective exchange rates are the real GDP per capita relative to trading partners, oil prices, fiscal expenditures and international openness. Despite expectations, net foreign assets do not exhibit a significant long run relationship with real exchange rates in Turkey. Persistent rise in productivity measure (GDP per capita relative to major trading partners) is associated with the appreciation pressure on equilibrium exchange rates.

The Macroeconomics of Border Taxes

We analyze the dynamic macroeconomic effects of border adjustment taxes (BAT), both when they are a feature of corporate tax reform (C-BAT) and for the case of value-added tax (VAT). Our analysis arrives at the following main conclusions. First, C-BAT is unlikely to be neutral at the macroeconomic level, as the conditions required for neutrality are unrealistic. The basis for neutrality of VAT is even weaker. Second, in response to the introduction of an unanticipated permanent C-BAT of 20% in the United States, the dollar appreciates strongly, by almost the size of the tax adjustment, and US exports and imports decline significantly, while the overall effect on output is small. Third, an equivalent change in VAT, in contrast to the C-BAT effect, generates only a weak appreciation of the dollar and a small decline in imports and exports, but has a large negative effect on output. Last, border taxes increase government revenues in periods of trade deficit; however, given the net foreign asset position of the United States, they result in a long-run loss of government revenues and an immediate net transfer to the rest of the world.

Dynamics of net foreign asset components in the EMU

In the last two decades, foreign capital investments have followed different paths in EMU countries. Given their importance for growth and productivity, we analyse the factors underlying the dynamics of foreign direct investments, portfolio debt investments, and portfolio equity investments in EMU countries over the years 1996–2014. We assess how the heterogeneous behaviour between core and peripheral countries can be related to macroeconomic factors (business cycle, trade, financial openness and spreads) and institutional quality. Our results show that financial integration as well as interest rates spread had an impact on the main components of foreign assets which was different between core and peripheral countries. In EMU countries as a whole we find a statistical significant relationship between institutional quality and foreign capital components, which is entirely driven by core countries.

Chinese outwards mercantilism – The art and practice of bundling

The Global Financial Crisis (GFC) brought to the fore the limits of the Chinese export led-growth strategy and the need for Chinese rebalancing of its international business approaches. Our paper takes stock of what may be the new chapter of Chinese outward-mercantilism, which aims at securing a higher rate of returns on its net foreign asset position, leveraging its success in manufacturing exports, natural resource imports and RMB internationalization. Using micro-level project data and macroeconomic covariates, we find positive association of Chinese trade and financial flows with China’s outward direct investment (ODI). The relationship is stronger for ODI originated from the Chinese state-owned enterprises, and strengthened by the provision of RMB swap-line agreements with China’s trading partners. The evidences support the conjecture that Chinese ODI is bundled to trade and financial linkages with its investment and trading partners.

The effects of fiscal targets in a monetary union: a Multi-Country Agent-Based Stock Flow Consistent model

We present an Agent Based-Stock Flow Consistent Multi-Country model of a Monetary Union to analyze the impact of a change in the fiscal regime of member countries, modeled as a permanent change in the deficit-to-gross domestic product (GDP) target that governments are committed to comply. Simulations are performed under three scenarios, differentiated by the number of countries considered (2, 6, 10). The parametric configuration employed yields economically reasonable values for the dynamics and relative dimension of key variables, broadly comparable with historical data and available stylized facts. Our policy experiments show that fiscal expansions generally allow to improve the dynamics of real GDP, labor productivity, and employment, though being generally associated with higher levels of public debt. Conversely, permanent fiscal contractions always exert strong recessionary effects, exacerbate real GDP volatility, and tend to be self-defeating in the long run. In scenarios where the Monetary Union includes a greater number of countries and the common market is bigger, fiscal austerity raises—rather than decreasing—average public debt-to-GDP ratios. We show that this is mainly related to a raise of debt-to-GDP in poorer and less productive countries mirrored by a reduction of their net foreign asset position.

From the World's Factory to a World Creditor: China's External Wealth and Excess Returns, 1997-2016

We study China’s external wealth, its net foreign assets position with valuation adjustment, and its excess returns. The net foreign assets of China, which are mainly dominated by foreign reserve assets and foreign direct investment liabilities, have grown rapidly since its entry to the World Trade Organization in 2001 and exceeded 14 percent of its gross domestic product at the end of 2016. In contrast, the excess returns of gross assets over gross liabilities, which mostly correspond to the sizable capital gains from the latter, are negative. These results occur mainly because of the composition effect between risky liabilities and safe assets, where China takes a short position in equity and a long position in debt. Our findings help elucidate the mechanism through which a high growth economy like China transfers its external wealth to the rest of the world when the domestic financial markets are less developed and safe assets are scarce in the international monetary system.

Money Supply Determinants in Nepal: A Macro Analysis

<p>This paper analyzes the major money supply determinants in Nepal in the past 10 years from FY 2004/05 - FY 20014/15. In this study monetary base is determined by two explanatory variables (i.e. NFA and NDC) and are called the 'proximate' determinants of the base money. Among the explanatory variables, the net foreign asset (NFA) is found as better determinant than net domestic assets (NDA) in Nepalese economy. For the analysis of determinants of money multiplier (MM), the three explanatory variables i.e., reserve to total deposits ratio (r), time deposits to demand deposits ratio (t) and currency to demand deposits ratio (c) have been used. The model applied in this study shows that explanatory variable of time deposits to demand deposits ratio is the best determinant of money multiplier. The reserve money (RM) is analyzed as the best determinant of money supply, net foreign assets (NFA) is the major determinant of reserve money and time deposits to demand deposits ratio is the significant determinant of money multiplier.</p><p> <strong><em>Economic Literature</em></strong><em>, </em>Vol. XIII August 2016, page 55-60</p>

Money Supply and Inflation: Disaggregated Time Series Evidence from Nigeria

This paper examined money supply and inflation in Nigeria. The objective was to examine the extent to which components of money supply affect Nigerian inflation rate. Time series data was sourced from Central Bank of Nigeria (CBN) statistical bulletin and Stock Exchange Factbook. Nigerian Real Inflation Rate was proxy for dependent (INFR) variables while Currency in Circulation (CR), Demand Deposit (DD), Time Deposit (TD), Savings Deposit (SD) and Net Foreign Asset (NFA) were used as independent variables. The Ordinary Least Square (OLS) method of cointegration, Augmented Dickey Fuller Unit Root, Granger Causality was used as data analysis techniques. Regression result in the study shows that Currency in Circulation, Demand Deposit and Savings Deposit has negative relationship while Net Foreign Asset and Time Deposit have positive relationship with inflation. The Augmented Dickey Fuller Test proved non stationarity of the variables at level except Net Foreign Asset but stationary at first difference. The Granger Causality Test reveals no casual relationship running through the variables. The cointegration proved no long run relationship between the dependent and independent variables. The study conclude that Money Supply have significant relationship with Nigerian Inflation Rate. It therefore recommends effective management of money supply by the monetary authorities to achieve the monetary policy objectives of price stability.

Currency Misalignments in the BRIICS Countries: Fixed Vs. Floating Exchange Rates

In the present paper we attempt to investigate whether the real effective exchange rates of the BRIICS countries, namely Brazil, Russia, India, Indonesia, China and South Africa, converge or not to their equilibrium levels. Our analysis is based on the use of an external balance model as well as the implementation of recent panel cointegration techniques. Our evidence indicates the existence of a valid long-run relationship between the real effective exchange rate, the net foreign assets, the GDP differential and the real interest rate differential for each of the six countries of our sample. Furthermore, our empirical results imply that after the adoption of a free floating exchange rate regime by Brazil, Russia, India, Indonesia and South Africa and the liberalisation of the Chinese exchange rate policy that took place during the last decade, currency misalignments have been gradually reduced, leading the real effective exchange rates of the respective currencies very close to their equilibrium levels.

Real Exchange Rate And External Competitiveness In Bangladesh: An Autoregressive Distributed Lag Analysis

Economists and policymakers often associate external competitiveness with the real exchange rate. This paper seeks to study Bangladesh’s external competitiveness by critically examining the determinants of the country’s real equilibrium exchange rate. While a number of studies have been done on Bangladesh in this area, no consensus has emerged on the determinants of real exchange rate. Few studies explicitly incorporate net foreign assets when modeling exchange rate change of Bangladesh. This paper plans to bridge this gap by developing a simple model in line with Musa (1984), Faruqee (1995), and Egert (2004). In this model, the current account in the long-run is driven by adjustment in the net foreign assets (NFA) towards a targeted level. Given a country’s long-run target for the stock of net foreign assets, the real equilibrium exchange rate then corresponds to a current account balance that is consistent with the income flows from this stock. The model is then tested by applying the autoregressive distributed lag (ARDL) bound testing approach by Pesaran et al. (2001) to the cointegration for the long-run and using the error correction model to examine the short-run dynamic relationship among real exchange rate, dual productivity differentials, net foreign assets, and real absorption. The empirical analysis is based on the annual data series from 1980 to 2014, collected electronically from the online databases of the IMF, the Penn World Table, and the World Bank. The empirical result show that, once shocked, real exchange rate convergence to equilibrium is quick with 64% of the adjustment occurring in the first year. The study finds that increased capital flow, greater real absorption, and faster productivity growth in the tradable sector relative to that of the non-tradable sector lead to real exchange rate appreciation. The estimated parameters are also stable. The paper then discusses policy implications and sheds some lights on the research limitations and future research considerations. For example, the paper recommends that Bangladesh should try to keep its currency relatively weak to protect domestic producers from foreign competition and strengthen their competitiveness to produce for and sell, particularly readymade garments, to world markets.

Multinational Production, Risk Sharing, and Home Equity Bias

We study the consequences of offshoring for international equity portfolios, risk sharing, and the international transmission of technology and government spending shocks. We show analytically that serving foreign markets by producing locally can substitute for international asset trade and terms of trade adjustment in delivering perfect risk sharing across countries: Offshore production implies that the consumption differential is tied to the real exchange rate even if the optimal equity portfolio is fully home-biased and the elasticity of substitution between domestic and foreign goods in consumption is different from one. Net foreign assets do not move in response to shocks. We investigate how the extent to which firms use source- versus host-country technology when producing abroad matters for the international transmission of shocks. A numerical illustration allows us to compare transparently the properties of our model to those of the alternative environment in which firms serve foreign markets by exporting.

International Capital Flow Pressures

Pressures on currencies manifest in exchange rate adjustments and international capital flows, and can also be offset by policy responses. This paper presents a theory-based measure of capital flow pressures, a new Exchange Market Pressure index, which combines pressures observed in exchange rate adjustments, official foreign exchange intervention and monetary policy changes. We use the index to identify so called safe-haven and risk-on status currencies and investigate the drivers of this status, showing the importance of country net foreign asset positions, size, and capital account openness. We also re-assess the contribution of the global financial factor in international capital flow pressures. The global factor explains a larger share of pressures on currencies measured using the EMP compared with using capital flow quantities. However, this global factor share is strongly dominated by idiosyncratic variation and only episodically large.

Roads and the Real Exchange Rate

This paper studies the effect of transport infrastructure on the real exchange rate (RER) and reaches two relatively strong conclusions. First, while the list of robust determinants of the RER is not long, transport infrastructure belongs to that list. Many other potential determinants proposed in the literature, such as net foreign asset position or terms of trade, turn out to be not robust. Second, in terms of economic significance, the infrastructure effect follows closely the well-known Balassa-Samuelson effect and is one of the most important explanatory variables for RER movements, especially in developing countries.

Net foreign asset positions and appreciation expectations on the Swiss franc and the Japanese Yen

The paper shows that currencies of countries with persistent current account surpluses and high foreign-currency denominated assets, such as the Swiss franc and the Japanese yen, are under persistent appreciation pressure, particularly when the centres of the world monetary system follow expansionary monetary policies. This limits the choice of exchange rate regime. Given flexible exchange rates, a negative risk premium on the domestic interest rate can emerge. Empirical estimations provide mixed evidence for a negative impact of net foreign asset positions and exchange rate uncertainty on interest rates of international creditor countries at the periphery of the world monetary system.

Do Sterilized Foreign Exchange Interventions Create Money?

When a central bank accumulates foreign reserves, there are two possible ways of balance of payments adjustment: (1) decreasing commercial banks’ net foreign assets and, (2) decreasing the non-banking sector’s net foreign assets and/or increasing the current account surplus. In the latter case, money is created. It does not matter whether the central bank sterilizes the bank reserves that it supplied to the money market and prevents the interest rate change – money will be created anyway (although sterilization may prevent further money creation through credit extension). Our empirical analysis shows that for emerging markets the type (2) adjustment is more common than type (1). Therefore, the accumulation of foreign reserves is likely to create money even when sterilized (i.e. it does not lead to lower money market interest rates).

Global Imbalances from a Stock Perspective

After the recent crisis, a reduction was observed in global current account (“flow”) imbalances. Even so, global disequilibria as measured in terms of countries’ net foreign assets (“stock imbalances”) kept increasing. This paper discusses whether stock imbalances have a stabilising or destabilising impact on countries’ accumulation of external wealth. That is, do creditor economies, by virtue of their positive stock of net foreign assets, keep accumulating — everything else equal — external wealth? Do debtor countries, due to their negative net foreign assets position, keep accumulating external debt? Our results show that in debtor economies the existing stock of net debt helps to limit current account deficits, thus halting future debt accumulation. In creditor countries, however, the positive stock of net foreign assets contributes — everything else equal — to increase future current account surpluses, potentially leading to destabilising dynamics in wealth accumulation. This asymmetry between creditors and debtors holds in spite of the stabilising impact that net foreign assets have on the trade balance of creditor countries through real exchange rate fluctuations, and might have major implications for global trade and growth.

Should We Fear a Crisis of the CFA Franc?

Since the decline in world oil prices that began in July 2014, the macroeconomic fundamentals of the CEMAC countries have deteriorated, notably the balance of payments. The degradation of the current balances is likely to extend downwards; raising concerns about the stability of the exchange rate. Based on interrupted time series modeling, the analysis shows that the oil shock immediately led to a decline in CEMAC's net foreign assets, as well as their trend. The model predicts a continued degradation of these foreign assets if oil prices remain low. As a result, there is a risk of the fixed exchange rate of the CFA franc of Central Africa becoming unsustainable. This situation can also lead to currency instability if economic policies do not lead to a return to economic growth.

The Impact of the Fracking Boom on Arab Oil Producers

ABSTRACT This article makes four contributions. First, it investigates the extent to which the U.S. fracking boom has caused Arab oil exports to decline since late 2008. Second, the article quantifies for the first time by how much the U.S. fracking boom has lowered the global price of oil. Using a novel econometric methodology, it is shown that in mid-2014, for example, the Brent price of crude oil was lower by $10 than it would have been in the absence of the fracking boom. Third, the article provides evidence that the decline in Saudi net foreign assets between mid- 2014 and August 2015 would have been reduced by 27% in the absence of the fracking boom. Finally, the article discusses the policy choices faced by Saudi Arabia and other Arab oil producers.

Is the yen misaligned more during the Abenomics period?

This paper measures the extent to which the real effective exchange rate of the Japanese yen is misaligned from its equilibrium value. The equilibrium value is estimated using the behavioral equilibrium exchange rate (BEER) approach to determine whether the yen is more misaligned during the Abenomics period. Economic fundamentals such as terms of trade, relative price of nontraded to traded goods, net foreign asset ratio over trade volume, and real interest rate differentials are used to assess the equilibrium exchange rate. Because parameter instability is detected for the whole period (1993 Q1–2016 Q2), stable estimation results for the subsample period (2003 Q1–2016 Q2) are used to compute misalignments. The results indicate that the yen was substantially overvalued during the global financial crisis period (2008 Q4–2012 Q4). In contrast, it was undervalued during the Abenomics period (2013 Q1–2016 Q2) but was much less misaligned than in pre-Abenomics periods.

Factors of Exports Dynamics and Import Substitution after the Sharp Exchange Rate Depreciation

The article deals with the problem of finding out factors promoting high export growth rates and successful import substitution after the sharp real exchange rate depreciation, which took place in Russia. The share of domestically-produced goods and services in domestic demand based on current prices, as well as the growth rate of the domestic demand covered by domestic production, are used as indicators for import substitution. Following the results of cross-country panel regressions, it is demonstrated that Russia’s positive net foreign assets position is favourable for export growth after the depreciation. On the other hand, the share of imported components in Russian non-oil-and-gas exports is close to the world average, so it cannot be stated that Russia’s export structure is favourable from the viewpoint of the magnitude of the depreciation’s positive impact. The analysis of Russia’s non-oil-and-gas exports dynamics measured in constant prices, shows that in recent years, the growth rates undershot the modeled ones. According to the net exports dynamics, in 2014–2015, this discrepancy was offset by the fact that the import contraction rates were significantly higher than the modeled ones. In 2016, however, the contribution of “additional” (as compared to the model) net exports fell to zero. The analysis also demonstrates that in the medium term, low quality of the institutional environment in Russia hinders maintaining momentum for exports and import substitution associated with the depreciation. Thus, despite the significance of the currently in-progress measures promoting non-commodity exports and import substitution, they should be complemented by constant efforts aimed at reducing investment risks, enhancing quality of governance, and safeguarding competition.