Net Foreign Assets Research Articles

Are There Oil Currencies? The Real Exchange Rate of Oil Exporting Countries

This paper investigates whether the real oil price has an impact on the real exchange rates of three main oil-exporting countries: Norway, Russia and Saudi Arabia. We create our measure of the real effective exchange rates for Norway and Saudi Arabia (1980-2006) and for Russia (1995-2006), testing if real oil prices and productivity differentials against 15 OECD countries influence exchange rates. In the case of Russia it is possible to establish a positive long-run relationship between the real oil price and the real exchange rate. However, we find virtually no impact of the real oil price on the real exchange rates of Norway and Saudi Arabia. The diverse exchange rate regimes cannot help in explaining the different empirical results on the impact of oil prices across countries, which instead may be due to other policy responses, namely the accumulation of net foreign assets and their sterilisation, and specific institutional characteristics.

International Risk-Taking, Volatility, and Consumption Growth

We show that countries that take on more international risk are rewarded with higher expected consumption growth. International risk is defined as the beta of a country’s consumption growth with world consumption growth. High‐beta countries hold more foreign assets, as predicted by the theory. Despite the positive effects of beta, a country’s idiosyncratic volatility is negatively correlated with expected consumption growth. Therefore, uninsured shocks affect not only current growth, but also future consumption growth. High‐volatility countries have worse net foreign asset positions, suggesting that solvency constraints limit their future growth.

Exchange Rates and External Adjustment: Does Financial Globalization Matter?

This paper addresses the implications of financial globalization for exchange rate behavior. We highlight two dimensions: first, a wider dispersion in net foreign asset positions implies stronger long-term trends in real exchange rates; second, the impact of currency movements on net external wealth is an increasing function of the scale of international balance sheets.

Terms‐of‐Trade Shocks and Exchange Rate Regimes in a Small Open Economy*

We examine the impact of terms‐of‐trade shocks on key macroeconomic variables by numerically solving a dynamic stochastic general equilibrium model of a small open economy. The model considers nominal price rigidity under different exchange rate regimes. The numerical solutions obtained are consistent with the empirical regularities documented by Broda (2004), in which output responses to shocks are smoother in floats than in pegs; in moving from pegs to floats, the rise in nominal exchange rate volatility is coupled by the rise in real exchange rate volatility; and in both exchange rate regimes, net foreign assets is the most volatile variable.

The Larger Europe: Technological Convergence and Labour Migration

Résumé Nous explorons la croissance tendancielle de l’Europe au sein de l’économie mondiale. La recherche couvre la première moitié du xxi e siècle. Les principaux facteurs du régime de croissance vont être la transition démographique et la diffusion du progrès technique. Nous utilisons le modèle ingenue qui découpe le monde en dix grandes régions. Des hypothèses sont formulées sur ces facteurs et discutée dans une perspective historique. Les changements structurels impliqués par ces hypothèses sont introduits dans ingenue pour faire des scénarios prospectifs. Un scénario de référence est construit qui décrit les principales caractéristiques macroéconomiques des grandes régions. Parce qu’il veut être la base à partir de laquelle sont étudiées des variantes, ce scénario est conservateur dans les changements structurels et institutionnels qu’il incorpore. Il décrit l’Europe occidentale comme une région vieillissante à croissance faible, qui accumule des actifs nets sur l’étranger et qui bénéficie d’une appréciation réelle de l’euro. Ce sont les caractéristiques d’un créancier permanent qui tire parti de la mobilité du capital. Deux scénarios illustrent les frontières de l’Europe. D’abord, on suppose que l’élargissement vers l’Est accélère le rattrapage technologique de l’Europe de l’Est et donne une impulsion à la croissance. Ensuite, on simule une politique d’immigration en Europe de l’Ouest pour compenser le déclin de la population active et modérer l’augmentation du coût du financement public des retraites. Le modèle met en évidence et quantifie les effets bénéfiques en Europe de l’Ouest et les effets contraires dans les zones d’émigration. Classification JEL : C68, D91, F21, F22, H55.

Investor Protection and International Investment Positions: An Empirical Analysis*

AbstractGiven the recent revival of interest in the institutional determinants of global capital flows, we investigate the relationship between investor protection and international investment positions, using data on 40 countries for the period 1970–98. We find that strong shareholder protection is an important predictor of gross foreign direct investment liabilities, while countries with strong creditor protection tend to have positive stocks of net foreign assets. We conclude that the global pattern of investor protection is a significant determinant of international investment positions.

Neither a borrower nor a lender: Does China's zero net foreign asset position make economic sense?

China in the past few years has emerged as a net foreign creditor on the international scene with net foreign assets (NFAs) slightly greater than 0% of wealth. This is surprising given that China is a relatively poor country with a capital–labor ratio about one-fifth the world average and one-tenth the US level. We ask whether it makes economic sense for China to be a net creditor and what China's NFA position might be in 20 years. We calibrate a theoretical model of international capital flows featuring diminishing returns, production risk, and sovereign risk. Our calibrations for China yield a predicted NFA position of −17% of China's wealth. We also estimate non-structural cross-country regressions of determinants of NFAs in which China is always a significant outlier with around 9% points more of NFAs relative to wealth than is predicted by its characteristics. We speculate that a variety of domestic distortions account for these deviations from the theory and cross-country empirics. We calibrate and predict different—and necessarily speculative—scenarios out to 2025, assuming that China's NFA position eventually conforms with the theoretical and cross-country regularities. Our scenarios suggest a future negative NFA position between 3% and 9% of wealth. Starting from China's zero NFA position, it would take current account deficits in the range of 2–5% of GDP to reach any of these future NFA positions. These are not unreasonable deficits, but they would require a large adjustment from the present 6% of GDP current account surplus.

Comments on: David Dollar and Aart Kraay, Neither a borrower nor a lender: Does China's zero net foreign asset position make economic sense?”

Comments on: David Dollar and Aart Kraay, Neither a borrower nor a lender: Does China's zero net foreign asset position make economic sense?”

How well can the New Open Economy Macroeconomics explain the exchange rate and current account?

This paper advances the New Open Economy Macroeconomic literature in an empirical direction, estimating and testing a two-country model. Fit to U.S. and G7 data, the model performs moderately well for the exchange rate and current account. Results offer guidance for future theoretical work. Parameter estimates lend support to the assumption of local currency pricing. Estimates are found for key parameters commonly calibrated in the theoretical literature, such as the elasticity of substitution between home and foreign composite goods, and the response of a country's risk premium to the net foreign asset position. Results also indicate that deviations from interest rate parity are not closely related to monetary policy shocks, as recently hypothesized, but that these deviations are strongly related to shifts in the current account.

International Portfolio Equilibrium and the Current Account

This paper analyzes the determinants of international asset portfolios, using a neoclassical dynamic general equilibrium model with home bias in consumption. For plausible parameter values, the model explains the fact that typical investors hold most of their wealth in domestic assets (portfolio home bias). In the model, the current account balance (change in net foreign assets) is mainly driven by fluctuations in equity prices; the current account is predicted to be highly volatile and to exhibit low serial correlation; changes in a country's foreign equity assets and liabilities are predicted to be highly positively correlated. The paper constructs current account series that include external capital gains/losses, for 17 OECD economies. The behavior of the empirical series confirms the theoretical predictions.

Macroeconomic interdependence under incomplete markets

This paper uses a two-country, flexible-price model with overlapping generations of infinitely lived households to study the role of net foreign asset dynamics in the propagation of productivity shocks. Absence of Ricardian equivalence ensures existence of a unique steady-state level of net foreign assets, to which the economy returns following temporary shocks. Model dynamics are significantly different from those of a setup in which terms of trade movements perform all the international adjustment and net foreign assets do not move. The difference relative to a complete markets economy in which net foreign asset movements play no role in shock transmission is smaller. It is amplified if the substitutability across goods rises and if shocks are permanent.

Global Imbalances or Bad Accounting? The Missing Dark Matter in the Wealth of Nations

This paper argues that current account statistics may provide a poor indication for the real evolution of a country’s net foreign assets. This may be due to a series of factors including the mismeasurement of FDI, unreported trade of insurance or liquidity services and debt relief. Because of these problems we suggest estimating net foreign assets by capitalizing the net investment income and then estimating the current account from the changes in this stock of foreign assets. We call dark matter the difference between our measure of net foreign assets and that portrayed by official statistics. We find dark matter to be important for many countries and that it relates to FDI flows, domestic volatility, and debt relief. We also find that, once dark matter is taken into account, global net asset positions appear to be relatively stable. In particular, the exports of dark matter of the US appear to be fairly steady and large enough to keep the US net asset position stable, casting doubts on the need for a major adjustment of the dollar or a large rebalancing of the global economy. [Jointly published as Center for International Development Working Paper No. 124 and KSG Faculty Research Working Paper Series RWP06-003.]

Real Effective Exchange Rate Determination in Indonesia: A Behavioral Equilibrium Exchange Rate Approach

The aim of this paper is to analyze the determination of real effective exchange rate in Indonesia for the period 1994.1-2004.6 using behavioral approach. The sets of funda¬mental variables consisting of net foreign asset, term of trade, ratio total trade to GDP, pri¬vate and government consumption were used to estimate for resulting estimation of behav¬ioral real effective exchange rate. The data was used in this study using time series monthly data from 1994.1 – 2004.6. The source of data were taken from International Financial Statistic and Central Bank of Indonesia. The method of analysis is multivariate cointegration methods of Johansen to determine the long run relationship real effective exchange rate. Exchange rate misalign¬ment was also used in this study by plotting the series between actual real effective exchange rate and the behavioral equilibrium exchange rate. The results of this study showed that from the estimation result of behavioral equi¬librium exchange rate, some variables of the sets fundamental variables such as net foreign asset, term of trade and ratio total trade to GDP were correctly signed, plausible magnitude and statistically significant. But, government and private consumption were not statistically significant and incorrectly signed. From the plotted result between actual and equilibrium estimation, it represents that for the period post-1997, the currency has been undervalued. The close alignment between actual and equilibrium was occurred in 1998 and 1999. But at the end of the sample, the currency looked overvalued. Keywords: Real effective exchange rate, Behavioral equilibrium approach, Cointegration

International Portfolio Equilibrium and the Current Account

This paper analyses the determinants of international asset portfolios, using a neoclassical dynamic general equilibrium model with home bias in consumption. For plausible parameter values, the model explains the fact that typical investors hold most of their wealth in domestic assets (portfolio home bias). In the model, the current account balance (change in net foreign assets) is mainly driven by fluctuations in equity prices; the current account is predicted to be highly volatile and to exhibit low serial correlation; changes in a country's foreign equity assets and liabilities are predicted to be highly positively correlated. The paper constructs current account series that include external capital gains/losses, for 17 OECD economies. The behaviour of those series confirms the theoretical predictions.

The External Wealth of Nations Mark Ii: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004

We construct estimates of external assets and liabilities for over 140 countries over the period 1970-2004. We describe our estimation methods and present some key features of the data, both at the country and at the global level. We focus in particular on trends in net and gross external positions, as well as on the composition of international portfolios, distinguishing between foreign direct investment, portfolio equity investment, foreign exchange reserves, and external debt. We also document the existence of a “world net foreign asset discrepancy” (the stock counterpart to the world current account discrepancy) and identify the asset categories that account for this discrepancy.

The Swedish External Position and the Krona

This paper addresses the dynamics of the Swedish external position, with a particular focus on its inter-relation with the external value of the krona. We argue that financial globalisation means that a broader conceptual framework is required, whereby exchange rate fluctuations operate through the ‘valuation channel’ of external adjustment, in addition to the traditional trade balance channel. In the other direction, we highlight that the projected trend for the trade balance is an important influence on the long-term prospects for the krona. Finally, we seek to assess the future direction for the Swedish net foreign asset position by investigating the likely impact of demographic change and shifts in the Swedish position in the world income distribution.

The Transfer Problem in the Euro Area: A Cointegration Analysis

This paper empirically investigates the Transfer problem for the vis a vis the Rest of the world. The empirical analysis is developed in a theoretically and statistically consistent way and is intended as a contribution to the literature on the macroeconomics of EMU. The paper reaches three conclusions. First, Net foreign asset accumulation in the Euro area is consistent with real exchange appreciation (Transfer effect). Second, the Transfer effect works essentially through the relative price of nontradables rather than through the terms of trade. Third, the transition from EMS to EMU has certainly had a statistically significant impact in terms of the Transfer effect. On the basis of currently available information, however, this appears to be of a transitory rather than permanent nature.

Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech Beer?

This paper investigates the equilibrium exchange rate of the Czech koruna using the reduced form equation of the stock-flow approach advocated, for instance, by Faruqee (1995) and Alberola and others (1999). We investigate whether or not the observed real exchange rate of the Czech koruna is close to its equilibrium value over the period from 1993 to 2004. Our empirical approach is tantamount to the Behavioral Equilibrium Exchange Rate (BEER) popularized by MacDonald (1997) and Clark and MacDonald (1998) in that the Czech real exchange rate vis-a-vis the euro is regressed on the dual productivity differential and the net foreign assets position, based on which actual and total misalignment figures are derived in a time series context. In other words, we check the quality of the Czech BEER. We also study the impact of a possible initial undervaluation on the estimated equilibrium exchange rate. Employing monthly time series from 1993:M1 to 2004:M9 and applying several alternative cointegration techniques, we identify a period of an overvaluation in 1997 and in 1999, an increasing overvaluation till 2002, an undervaluation in 2003 and a correction towards equilibrium in the second half of 2004.

The Determinants of Banking Crises and Currency Crises

This paper studies the factors associated with the emergence of banking crises and currency crises and the interrelationship between the two crises in 21 American, European and Asian countries in 1973~2000 using a multivariate logit econometric model. And this analysis attempts to introduce the lag model to solve the causality problems in banking crises and currency crises. In case of the simple binary models without lag, banking crises were associated with economic recession, inflation, depreciation, the rise of real interest rate, lending boom. But in case of lag models, banking crises were caused by economic recession, inflation, the rise of real interest rate, lending boom, the rise of reserve ratio, the liberalization of capital account. Currency crises were associated with economic recession, the larger deficit of current account relative to import in case of the simple binary models without lag, But in case of lag models, currency crises were caused by economic recession, the rapid decrease of net foreign assets of banks, and the larger deficit of current account relative to import. And this analysis shows that currency crises can be a cause of banking crises, not vice versa. Nevertheless the two types of crises have positive correlation with each other.

(The Determinants of Banking Crises and Currency Crises)

Korean Abstract: 이 논문은 다변수로짓계량모형을 이용하여 1973~2000년 아시아, 아메리카, 유럽 21개국의 은행위기 및 통화위기 발생을 초래하였던 요인을 찾고 나아가 두 위기간의 상호관계를 분석한 것이다. 이 분석은 자료의 기준시점에서 비롯된 인과관계 혼란 등의 문제를 해결하는 동시에 종속변수인 은행위기 또는 통화위기와 설명변수와의 인과관계를 설정하는 방편으로 시차를 도입함으로써 두 위기를 초래하는 선행원인이 무엇인가를 살펴보고 시차를 도입하지 않은 경우와도 비교하였다. 시차를 고려하지 않은 기존방법의 분석에서는 은행위기는 경기침체, 인플레이션, 환율인상, 실질이자율 상승, 대출붐과 연관되어 있었다. 하지만 시차를 도입한 경우에는 은행위기는 경기침체, 인플레이션, 실질이자율 상승, 대출붐뿐 아니라 실제지급준비율의 상승, 자본자유화 등에 의해 초래될 수 있는 것으로 나타났다. 통화위기는 시차를 고려한 경우나 아닌 경우 큰 차이를 보이지 않았다. 시차를 고려하지 않은 기존방법의 분석에서는 통화위기는 경기침체, 경상수지 적자와 연관되어 있었다. 하지만 시차를 고려한 경우에는 통화위기가 경기침체, 경상수지 적자는 물론 은행의 대외순자산 감소(또는 순부채 증가)에 의해서도 초래될 수 있는 것으로 나타났다. 그리고 은행위기와 통화위기간의 상호관계를 보기 위해 은행위기의 설명변수로 통화위기를, 통화위기의 설명변수로 은행위기를 설정하여 분석한 결과, 선행한 통화위기가 은행위기의 한 원인은 될 수 있지만, 선행한 은행위기가 통화위기의 한 원인이 되는 것은 아니었다. 그럼에도 불구하고 은행위기와 통화위기는 의미 있는 상관관계를 가질 정도로 같은 연도에 발생하는 경우가 적지 않았다. English Abstract: This paper studies the factors associated with the emergence of banking crises and currency crises and the interrelationship between the two crises in 21 American, European and Asian countries in 1973~2000 using a multivariate logit econometric model. And this analysis attempts to introduce the lag model to solve the causality problems in banking crises and currency crises. In case of the simple binary models without lag, banking crises were associated with economic recession, inflation, depreciation, the rise of real interest rate, lending boom. But in case of lag models, banking crises were caused by economic recession, inflation, the rise of real interest rate, lending boom, the rise of reserve ratio, the liberalization of capital account. Currency crises were associated with economic recession, the larger deficit of current account relative to import in case of the simple binary models without lag, But in case of lag models, currency crises were caused by economic recession, the rapid decrease of net foreign assets of banks, and the larger deficit of current account relative to import. And this analysis shows that currency crises can be a cause of banking crises, not vice versa. Nevertheless the two types of crises have positive correlation with each other.