Net Foreign Assets Research Articles

Life-Cycles, Dynasties, Saving: Implications for Closed and Small, Open Economies

This paper examines the macroeconomic implications of life-cycle and dynastic saving behavior for closed and small, open economies. Using an extended version of Blanchard`s overlapping agents model, the analytical framework nests these two competing views, treating agents as either dynastic households or disconnected generations. Calibrating the life-cycle variant using empirical age-earnings profiles, the analysis compares the long-run effects of fiscal policy shocks under both perspectives. The results quantify the implications of life-cycle considerations for the effects of deficit finance on real interest rates and the capital stock or net foreign assets.

The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates

The relationship between international payments and the real exchange rate--the transfer problem--is a classic question in international economics. We use new data on countries' net external positions together with real exchange rate data to shed light on this question. We present a model yielding testable implications on the long-run co-movements of real exchange rates, external positions, relative GDP and terms of trade, and cross-country and time-series evidence on the subject. Countries with net external liabilities are found to have more depreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods.

The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates

The relationship between international payments and the real exchange rate—the “transfer problem”—is a classic question in international economics. We use new data on countries’ net external positions together with real exchange rate data to shed light on this question. We present a model yielding testable implications on the long-run co-movements of real exchange rates, external positions, relative GDP and terms of trade, and cross-country and time-series evidence on the subject. Countries with net external liabilities are found to have more depreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods.

Life-Cycles, Dynasties, Savings: Implications for Closed and Small, Open Economies

This paper examines the macroeconomic implications of life-cycle and dynastic saving behavior for closed and small, open economies. Using an extended version of Blanchard’s overlapping agents model, the analytical framework nests these two competing views, treating agents as either dynastic households or disconnected generations. Calibrating the life-cycle variant using empirical age-earnings profiles, the analysis compares the long-run effects of fiscal policy shocks under both perspectives. The results quantify the implications of life-cycle considerations for the effects of deficit finance on real interest rates and the capital stock or net foreign assets.

Tax reform and external balance

This paper examines the effect of a transformation from capital taxation to consumption in an open economy. With the residential capital tax rate being endogenous, an increase in the domestic consumption tax rate decreases the interest rate, increases capital accumulation, and increases the domestic country's net foreign asset holdings and trade surplus. With the territorial capital tax rate being endogenous, an increase in the domestic consumption tax rate may either increase or decrease the domestic country's interest rate, net foreign asset holdings and trade surplus, depending on the interest elasticity of capital demand.

Banana price shocks and adjustment within a unified currency area

The paper traces the impact of a shock to banana prices on key macroeconomic variables for the Windward Islands and the Eastern Caribbean Central Bank (ECCB) Monetary Union as a whole. Net foreign assets of Dominica are expected to show the largest decline while those for Grenada the least. The impact on the net foreign assets of the subregion may be mitigated by other foreign exchange inflows. In addition there was little variation in the growth in M1 with the exception of Dominica suggesting money-output neutrality. Government revenues were not adversely affected suggesting that the terms of trade shock may be viewed as being temporary and agents borrow to maintain existing tastes and preferences. This result hinged on the nexus between government revenue and the reliance on trade taxes on imports suggesting some ambiguity in the explanation of the Harberger-Laursen-Meltzer effect.

Habits, costly investment, and current account dynamics

We analyze the current account dynamics for a small country model with habit-forming consumers and costly investment. The model has several empirical and policy implications. (i) It is consistent with stylized facts regarding the effects of productivity shocks and increases in fiscal spending and regarding the savings–investment co-movement. (ii) The long-run effect of a temporary shock on net foreign assets is often opposite to that of a permanent shock. (iii) Under strong habit persistence, the welfare dynamics are sluggish, so that a beneficial tax-financed fiscal policy may have a harmful hangover effect on welfare.

The Effects of foreign exchange intervention policy in Korea

Most countries engage in indirect intervention in the foreign exchange market in order to stabilize the exchange rate under a flexible exchange rate regime, even though the exchange rate is mainly determined in the foreign exchange market. This empirical study , using the change in net foreign asset as a proxy variable of the intervention, shows that the intervention increases the volatility of the exchange rate and raises the level of exchange rate only in the short run. However, the positive aspect of the intervention is that it did not increase the volatility of the exchange rate during the period after the financial crisis. This implies that the policy of improvement in foreign reserves contributes to the stability of the foreign exchange market. To have an effective intervention policy in the future, the government needs to restore credibility through the consistent policy action and conduct complete analysis of exchange traders’ behavior.

Dynamic applied general equilibrium trade policy analysis in the presence of foreign asset cross-ownership

This paper addresses the question to which extent the prevailing modelling practice of ignoring foreign asset cross-ownership patterns in applied general equilibrium trade policy studies may give rise to distorted predictions. The analytic framework is a stylized dynamic two-country model with international capital mobility and intertemporally optimizing agents. In principle even the sign of the predicted welfare effect of a trade policy shock might reverse, when the actual cross-ownership structure underlying a given net foreign asset position is taken into account. However, the analysis also indicates conditions under which the error incurred by disregarding asset crossholdings remains negligible.

A General Equilibrium Analysis of Short-Term Interest Rate Policies and the Role of Reserve Requirements

Using a general equilibrium model, this paper analyzes the transmission of short-term interest rate policies aimed at exchange rate stabilization or money stock targeting, and addresses the usefulness of reserve requirements imposed to sustain these policies. It is concluded that the financial effects of these instruments are mostly ambiguous, and depend crucially on the financial structure. Changes in net foreign assets of banks are found to convey little information on tension in the exchange market. Finally, a market-based remuneration of required reserves may impair or increase the effectiveness of monetary policy, depending on the choice of policy target.

Macroeconomic adjustment with segmented labor markets

This paper analyzes the macroeconomic effects of fiscal and labor market policies in a developing economy with an informal sector and a heterogeneous work force. A permanent reduction in government spending on nontraded goods leads in the long run to a depreciation of the real exchange rate, a fall in the market-clearing wage for unskilled labor, an increase in output of traded goods, and a lower stock of net foreign assets. A permanent reduction in the minimum wage improves competitiveness, and expands the formal sector. The effect of changes in unemployment benefits are also analyzed.

The External Wealth of Nations: Measures of Foreign Assets and Liabilities for Industrial and Developing Countries

Capital flows are closely monitored, but surprisingly little is known about the stocks of external assets and liabilities held by countries, especially in the developing world. This paper constructs estimates of foreign assets and liabilities and their equity and debt subcomponents for 66 industrial and developing countries for the period 1970-97. It explores the sensitivity of estimates of stock positions to the treatment of valuation effects not captured in balance of payments data. Finally, it characterizes the stylized facts of estimated stocks and asks whether there are trends in net foreign asset positions and differences in debt-equity ratios across countries.

Capital inflows, external shocks, and the real exchange rate

This paper examines the effects of a fall in world interest rates on capital flows and the real exchange rate in an optimizing framework with imperfect capital markets. A permanent fall leads to a steady-state reduction in net foreign assets and a real depreciation, regardless of whether the country is initially a net creditor or net debtor. On impact, the real exchange rate appreciates in the net debtor case, but may either appreciate or depreciate in the net creditor case. The dynamics associated with a temporary shock depend not only on its duration but also on the initial asset position.

Taxing Consumption in an Open Economy

This article examines the effects of consumption taxation on capital accumulation, net foreign asset holdings, the trade balance, and welfare in a two-country overlap ping generations model. Government finances its lump-sum transfers by taxing consumption. An increase in the domestic consumption tax rate decreases the real interest rate and increases the capital-labor ratio and the wage rate in both countries. An increase in the domestic consumption tax rate raises the domestic country's net foreign asset holdings and trade surplus but may either increase or reduce the welfare of the representative domestic individual.

Inflation and monetary policy in selected West and Central African countries

This paper studies the conduct and performance of monetary policy in five West and Central African countries: Cameroon, Côte d'Ivoire, Gabon, Ghana and Nigeria. The first three are members of the CFA Zone and maintain a fixed peg vis-à-vis the French franc. The other two have recently opted for a more flexible exchange rate regime. No general conclusion can be drawn on the monetary policy-exchange rate policy nexus. Estimates of the offset coefficient are significantly different from (negative) one but VAR estimation results on the ability of the monetary authority to pursue an independent inflation target are mixed. The monetary authorities of Ghana and Nigeria sterilize the accumulation of net foreign assets to a limited degree; no such evidence exists for CFA Zone members.

Capital Taxation and External Accounts in a Small Growing Economy

The effects of capital taxation on external accounts depend on how government allocates the tax revenue. With government debt being endogenous, an increase in either the residential or territorial capital tax rate may decrease net foreign asset holdings. With intergenerational transfers being endogenous, an increase in either the residential or territorial capital tax rate may increase net foreign asset holdings. With government spending being endogenous, an increase in the residential capital tax rate may either deteriorate or have no effect on the external accounts.

The surge in capital flows: analysis of ‘pull’ and ‘push’ factors

This paper uses an intertemporal optimizing model of a small open economy facing imperfect world capital markets to assess the effects of ‘pull’ and ‘push’ factors on capital flows, asset accumulation, and the real exchange rate. A positive money demand shock raises consumption and holdings of foreign assets and appreciates the real exchange rate in the long run; it has an ambiguous effect on real money balances on impact. A positive productivity shock in the traded goods sector also leads to a long-run real appreciation (the Balassa-Samuelson effect), but the impact effect on relative prices is ambiguous. An increase in government spending on home goods leads to a real appreciation in the long run, but it has an ambiguous effect on the economy’s stock of net foreign assets. The dynamic effects associated with a reduction in the world interest rate depend on the degree of intertemporal substitution in consumption and the initial asset position of private agents. © 1998 John Wiley & Sons, Ltd.

Meaningful Measures of the Current Account

Since the conventional current account uses cash‐flow accounting, it is potentially devoid of economic meaning. Assessing foreign assets at market values and including expected transfers from abroad, this paper reports two measures of the external surplus that are grounded in economic theory. The first measure is the aggregate generational current account, annual differences in the sum of net foreign assets across all current and future generations. The second measure is the generational profile of net foreign assets in a benchmark year. These ideas are implemented with data from Korea.

Progressive taxes, equity, and human capital accumulation in an endogenous growth model with overlapping generations

This paper explores the trade-off between efficiency and intra- and intergenerational equity in an endogenous growth model of an open economy with overlapping generations and human capital accumulation. We demonstrate that progressive taxes hurt long-run growth and exacerbate distortions associated with intergenerational spillovers. However, by raising saving, these taxes strengthen the net foreign asset position.

Net Foreign Assets and Equilibrium Exchange Rates: Panel Evidence

By exploiting the information in a panel data set, this paper is able to construct more powerful tests of various hypotheses on the determinants of real exchange rates than would be possible with single-country time-series data. Focusing on annual data for 20 industrial countries from 1973 through 1995, there are three major results. First, the evidence for a stationary real exchange rate is stronger when the exchange rate is defined in terms of wholesale prices than consumer prices, presumably because of the greater tradability of wholesale commodities. Second, the half-life of shocks to the real exchange rate is between two and three years. Third, there is a significant and robust relationship between real exchange rates and net foreign assets.