Net Foreign Assets Research Articles

Demographic structures, savings, and international capital flows

This paper investigates how the different demographic characteristics of two countries will drive the flow of capital between them, as inhabitants of the longer-lived nation have a higher savings rate than do those with the shorter lifespan. It is motivated by the recent US experience during which its net foreign asset position declined dramatically, while simultaneously its longevity has fallen increasingly below that of other developed G7 economies. Our contribution is to address the issue by introducing empirically based survival (mortality) functions into a traditional two country macrodynamic framework. In doing so, we eliminate some of the unsatisfactory aspects associated with the traditional two country representative agent model. The sensitivity of the capital flows and the resulting net foreign assets of the two economies to key structural characteristics, and their consequences for savings are emphasized.

Business cycles in Ethiopia under alternative monetary policy rules

PurposeThe purpose of this paper is to compare business cycle fluctuations in Ethiopia under interest rate and money growth rules.Design/methodology/approachIn order to achieve this objective, the author constructs a medium-scale open economy dynamic stochastic general equilibrium (DSGE) model. The model features several nominal and real distortions including habit formation in consumption, price rigidity, deviation from purchasing power parity and imperfect capital mobility. The paper also distinguishes between liquidity-constrained and Ricardian households. The model parameters are calibrated for the Ethiopian economy based on data covering the period January 2000–April 2015.FindingsThe main result suggests that: the model economy with money growth rule is substantially less powerful or more muted for the amplification and transmission of exogenous shocks originating from government spending programs, monetary policy, technological progress and exchange rate movements. The responses of output to fiscal policy shocks are relatively stronger under autarky which appears to confirm the findings of Ilzetzki et al. (2013) who suggest bigger multipliers in self-sufficient, closed economies. With regard to positive productivity shock, however, the model with interest rate feedback rule generates a decline in output and an increase in inflation, which are at odds with conventional empirical regularities.Research limitations/implicationsThe major implication is that a central bank regulating some measure of monetary stocks should not expect (fear) as much expansion (contraction) in output following currency devaluation (liquidity withdrawal) as a sister central bank that relies on an interest rate feedback rule. As emphasized by Mishra et al. (2010) the necessary conditions for stronger transmission of interest-rule-based monetary policy shocks are hardly existent in emerging and developing economies targeting monetary aggregates; hence the relatively weaker responses of output and inflation in the model economy with money growth rule. Monetary policy authorities need to be cautious when using DSGE models to analyze business cycle dynamics. Quite often, DSGE models tend to mimic the proverbial “crooked house” built to every man’s advise. Whenever additional modification is made to an existing baseline model, previously established regularities break down. For instance, this paper documented negative response of output to technology shock. Such contradictions are not uncommon. For example, Furlanetto (2006) and Ramayandi (2008) have also found similarly inconsistent responses to fiscal and productivity shocks, respectively.Originality/valueUsing DSGE models for research and teaching purposes is not common in developing economies. To the best of the author’s knowledge, only one other Ethiopian author did apply DSGE model to study business cycle fluctuation in Ethiopia albeit under the implausible assumption of perfect capital mobility and a central bank following interest rate rule. The contribution of this paper is that it departs from these two unrealistic assumptions by allowing international risk premium as a function of the net foreign asset position of the country and by applying money growth rule which closely mimics the behavior of central banks in low-income economies such as Ethiopia.

THE POLAK’S MONETARY MODEL AND ITS APPLICATION ON MACEDONIAN CASE

Macroeconomic stability is very important for each economy because it constitutes the basis of sustainable economic growth and development. It means stable prices with a low level of inflation (internal stability), a stable foreign exchange rate, a relatively low and sustainable current account deficit in the balance of payments and a solvent position in the external indebtedness of the economy (external stability). International Monetary Fund (IMF) provides financial support to countries that have problems with internal and external stability. The IMF approach to macroeconomic stabilization is based on a so-called “monetary approach” to the balance of payments. The first IMF model designed for dealing with balance of payments disequilibrium was the Polak’s model on monetary programming. Its purpose is to integrate monetary, income and balance of payments analysis, and it represents the basis of the conditionality applied to IMF’s credit arrangements. This model investigates and determines the effect on income and balance of payments arising from the two important variables in the economy: (1) changes in domestic bank credits, and (2) changes in exports of goods and services. In other words, the model indicates what macroeconomics policies are required to achieve a given set of outcomes i.e. it determines policy targets consistent with explicit macroeconomic objectives. It consists of a set of four equations and contains two behavioral relationships: the demand for money function and the function of the demand for imports, and two identities: for the money supply and for the balance of payments. As such, Polak's monetary model extends classical quantitative money theory to the example of an open economy. Republic of North Macedonia, as a developing country that is remarkably open to the world (large share of export and import of goods and services in GDP) and with close cooperation with the IMF, the application of so-called financial programming based on Polak’s monetary model is of special importance. Based on the theoretical elaboration of the equations contained in the Polak’s monetary model, the paper attempts for its application to the case of Republic of North Macedonia and tries to determine and quantify the dependence of the changes in net foreign assets (foreign reserves) and gross domestic product (GDP) from the changes in domestic credits of the Macedonian banking sector. For that purpose, the data on gross domestic product (GDP), money supply (M4) and exports of goods and services for the period 2003-2018 were used from the State statistical office and National bank of the Republic of North Macedonia. By calculating the values of income velocity of money and propensity to import, the interdependence of domestic credits with gross domestic product and net foreign assets of the banking sector is calculated and analyzed.

أثر الحساب الجاري في الاساس النقدي من خلال سعر الصرف – العراق حالة دراسية للمدة 2004 - 2016

أهتم البحث باستقصاء أثر الحساب الجاري في الاساس النقدي(*) من خلال سعر الصرف، لان الاساس النقدي يتنامى بزيادة صافي الموجودات الاجنبية عبر العمليات النقدية والتي تصورها الميزانية العمومية للبنك المركزي والمقيدة بحركة الانفاق الحكومي والذي يهيمن علية التمويل من مصدر نفطي عبر صافي الصادرات خلال مدة البحث، وهذا الاجراء يحدد مستوى الطلب الكلي والناتج المحلي، وهذه العملية هي جوهر حركة الاساس النقدي، وبسبب ثبات سعر الصرف يكون صافي الاحتياطيات الاجنبية هي المحرك الاساس في خلق النقود عبر الاساس النقدي، لذلك نلاحظ ترابط وثيق بين الميزان المالي والحساب الجاري واسعار النفط والانفاق العام، لان صافي الاحتياطيات الاجنبية المتحققة هي التي تحدد عرض النقد بثبات سعر الصرف،من هنا توصل البحث الى اهم الاستنتاجات والتوصيات، ومن أهم الاستنتاجات عند تقدير الاثر للحساب الجاري على الاساس النقدي تبين وجود تكامل مشترك بينهما حسب اختبار (جوهانسن – جسليوس) عبر اختبارات الامكان الاعظم وأختبار الاثر، ووجود علاقة توازنية طويلة الاجل لاتتباعد كثيرأ عن بعضها البعض من خلال سلوكها، ومن أهم التوصيات اعادة تقييم القيمة الحقيقية لسعر صرف الدينار مقابل الدولار (لاستبعاد المغالاة) لصالح صافي الاحتياطيات الاجنبية لمتصاص الصدمات السعرية او التخفيف عنها بما في ذلك صدمة اسعار النفط عن طريق تغيير الانفاق الحكومي (الطلب الكلي) او تغيير مكوناته لصالح الانفاق الاستثماري لينعكس بمرونة اكبر في صافي الميزان التجاري عبر تخفيض الاستيرادات الاستهلاكية، اذ نسعى من خلال هذا التحليل الى انخفاض قيمة العملة المحلية كبديل لاستخدام الاحتياطيات الاجنبية وتجارب كل من الارجنتين والبرازيل وفنزويلاً والاردن والصين تشير الى ذلك.

Capital accumulation and dynamic gains from trade

We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation and trade imbalances. We develop a gradient-free method to compute the exact transition paths following a trade liberalization. We find that (i) larger countries accumulate a current account surplus, and financial resources flow from larger countries to smaller countries, boosting consumption in the latter, (ii) countries with larger short-run trade deficits accumulate capital faster, (iii) the gains are nonlinear in the reduction in trade costs, and (iv) capital accumulation accounts for substantial gains. The net foreign asset position before the liberalization is positively correlated with the gains. The tradables intensity in consumption goods production determines the static gains, and the tradables intensity in investment goods production determines the dynamic gains that include capital accumulation.

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.

The Exsistence of Economic Openness and the Strength of Real Exchange Rate

The important findings in this study are; First, economic openness in Indonesia is positively influenced by terms of trade and inflation, while in the Philippines it is positively affected by terms of trade and real exchange rates; Second, the strength of real exchange rates in Indonesia is positively influenced by money supply, net foreign assets, and economic openness, besides that it is negatively affected by inflation, while in the Philippines it is positively affected by the money supply; Third, economic opennes that affect the real exchange rate in Indonesia and the real exchange rate that affects the economic openness in the Philippines.

US real estate inflation prediction: Exchange rates and net foreign assets

The recent housing price inflation forecasting literature has focused on the use of domestic variables for prediction of housing price inflation. However, around 7% of all US housing sales are attributed to international buyers; a potentially important market force. Further, international finance theory finds a role for foreign savings shocks in causing the housing price bubble of the last decade. Under floating exchange rate regimes, the Dornbusch model predicts shocks to domestic or foreign economies will be reflected in exchange rates. When exchange rates are fixed, shocks are likely to affect the net foreign asset holdings. In this study, I examine the role of exchange rates returns and the net change in foreign asset holdings in improving US real estate inflation forecasts. I conduct in-sample and out-of-sample comparison of forecasting models relative to an autoregressive baseline model. I find that the inclusion of foreign sector variables can improve the US real estate inflation forecasts by up to 40%. This improvement is mostly driven by changes in the net foreign asset holdings at longer horizons. The results are robust to samples at the metropolitan level although with different gains.

DYNAMICS OF AUSTRIAN FOREIGN DIRECT INVESTMENT AND THEIR INFLUENCE ON THE NATIONAL ECONOMY

The purpose of the paper is to analyse the dynamics of Austrian foreign direct investments (FDI) and its role in the development of the national economy. The subject of research is the main components of Austrian foreign direct investments 2005–2017 and their impact on the national economic development. Methodology. Methods of comparative and statistical analysis were used to study the dynamics, structure, and economic impact of Austria’s FDI. Special attention was given to the dynamics of FDI inflows and outflows, accumulated investments, cross-border mergers and acquisitions, “Greenfield Investments”, the impact of FDI on the balance of payments and international investment position of Austria. The method of mathematical modelling in economics, in particular, regression analysis, based on annual data for the period from 2005 to 2015, was applied to assess the relationship between the main components of foreign direct investments and the indicator of the country’s economic growth – the gross domestic product (GDP) per capita. The following indicators were selected as independent variables: FDI liabilities, assets of FDI funds, as well as the balance of primary incomes. The dependent variable was the GDP per capita. It should be noted that such indicators as FDI assets and liabilities of FDI funds were not represented in the final model because of the high correlation between independent variables, and the relationship between GDP per capita and net foreign assets was insignificant. The assets of foreign direct investment funds have the greatest impact on the economy of the country, and the relationship between these indicators is direct. A slightly weaker relationship is observed between the balance of primary incomes and GDP per capita. The relationship between them is also direct. Liabilities of FDI have the least impact on the dependent variable in comparison with the other two. Findings. The growth of foreign direct investments of Austria, as a result of liberalization of the world and European economy, as a whole has a positive impact on its GDP. Thus, activities that are aimed at stimulating investments are fully justified and understandable. The paper determines important factors of Austria’s investment activity and attractiveness, as well as the main factors that influence the dynamics of FDI. The most important among them are: the level of education, the internal coefficient of investment, political stability, the terms of trade, the state of the financial sector. The results of the analysis show that Austria has a high level of business activity; the government conducts activities to stimulate investment in R&D and in high-tech enterprises, to create new jobs, to protect the environment etc. The results of the study allow forecasting a gradual improvement in the balance of the country’s primary incomes, which will contribute to the further growth of the current account surplus and will strengthen the positive influence of Austria on the development of the European and global financial systems. Practical implications. The results of the study will help to increase: the effectiveness of the investment policy of Austria to stimulate the country’s economic growth; the international competitiveness of national companies on European and world markets; the level of stability of Austria’s financial system to external shocks.

Labor Market Reforms, Precautionary Savings, and Global Imbalances

How do labor market reforms affect international competitiveness and net foreign assets? To answer this question, we build a two-region RBC model with labor market frictions, idiosyncratic consumption risk, and limited cross-sectional heterogeneity to establish a direct link between labor market reforms and changes in net foreign assets via a precautionary savings channel. We apply the model to simulate far-reaching labor market reforms in Germany during the mid-2000s. We find that reducing the generosity of unemployment benefits decreases wages, fosters employment and augments competitiveness as well as trade. In addition, we can explain a significant share of the observed increase in German net foreign assets. A standard representative agent framework is not able to generate any notable effects on net foreign assets and the current account.

Determinants of the Real Equilibrium Exchange Rate in Albania: An Estimation Based on the Co-Integration Approach

Problem/Relevance: Investigation of exchange rate behaviour has been an important topic in international monetary economics because of the impact of exchange rates on economies. One strand of the literature has focused on explaining the observed movement of the nominal or real exchange rate in terms of macroeconomic variables. Another strand of the literature has evaluated the behaviour of the real exchange rates in relation to the equilibrium exchange rate, which is the real exchange rate that is consistent with macroeconomic balances. Albania implements a free floating exchange rate regime; therefore, evaluating whether the actual real exchange rate is too strong or too weak compared with the real equilibrium exchanges rate has great relevance for the Albanian economy. Research Objective/Questions: Generally, the real exchange rate is defined as the nominal exchange rate adjusted for the relative price differential between domestic and foreign goods and services. So, an appreciation of the nominal exchange rate or higher inflation at home relative to other countries may lead to an appreciation of the real exchange rate. Such appreciation weakens the competitiveness of a country, widens the current account deficit and increases vulnerability to financial crises. The opposite holds true when the real exchange rate depreciates. The aim of this paper is, first, to estimate the equilibrium real exchange rate for the Albanian currency against the euro and, second, to assess the total exchange rate misalignment during the period of 2001Q1-2017Q1. Thus, the equilibrium real exchange rate is used as a benchmark for evaluating the misalignment of the actual real exchange rate. Methodology: This paper explores the determinants of the real exchange rate for Albania, during the period of 2001Q1-2017Q1, based on the stock-flow approach, the so called Behavioural Equilibrium Exchange Rate (BEER), which effectively employs reduced-form modelling of the exchange rate based on standard co-integration techniques. The stock of net foreign assets and productivity changes has been considered fundamental for the real exchange rate. We have used the Johansen co integration technique to test the existence of long-run relationships between our main variables and to evaluate the path of the equilibrium real exchange rate based on vector error correction model (VECM) results. Then the analysis is completed by calculating the degree of misalignment as the difference between the actual real exchange rate and the equilibrium real exchange rate. Major Findings: Based on the Johansen co-integration approach, we find one long-run relationship between the real exchange rate of the Albanian lek against the euro, relative productivity and net foreign assets during the period of 2001Q1 to 2017Q1. The model implies that the real exchange rate is affected, as we expected, by relative productivity and net foreign assets, confirming that an increase in both variables leads to an appreciation of the real exchange rate in the long run. Our results show that the behaviour of the actual real exchange rate is similar to the path of the equilibrium exchange rate and that the degree of misalignment throughout the period is estimated to be moderate. Implications: Our empirical results confirm that the degree of misalignment is reasonable, suggesting a consistency between macroeconomic (especially monetary) policies and the free floating exchange rate regime. Assessing real exchange rate misalignment is a very important issue for policy makers because of the severe welfare and efficiency costs that such misalignment can have for an economy.

When Old Meets Young? Germany's Population Ageing and the Current Account

In a three-region New Keynesian life-cycle model calibrated to Germany, the Euro area (without Germany) and the rest of the world, we analyze the impact of population ageing on net foreign asset and current account developments. Using unsynchronized demographic trends by taking those of Germany as given and assuming constant population everywhere else, we are able to generate German current account surpluses of up to 15% of GDP during the first half of this century. However, projected demographic trends from 2000 to 2080 in OECD countries (and China in an additional analysis) are much more synchronized. Feeding these into our model suggests that the average annual German current account surplus from 2000 to 2018 that should be attributed to ageing reduces to around 2.83% (1.23%) of GDP, with a maximum at 4.3% (2.7%) in 2006 (when taking into account China), turning negative around 2035.

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.

What Explains Current Account Surplus in Korea?

Since the currency crisis in 1998, Korea has experienced continuous current account surpluses. Recently, the current account surplus increased more rapidly—amounting to 7.7 percent of GDP in 2015. ...

Growth in a time of external imbalances

Globalization and financial integration have increased in the last three decades giving rise to cumulated large external imbalances. The question we address in this paper is whether economic growth can be affected by these external imbalances. We estimate an augmented growth equation with the external stock position of the countries measured by the net foreign asset position. Unlike previous literature, we use non-parametric methods that capture non-linearities and heterogeneity, and apply them to a sample that includes 106 developed and developing countries for the period 1983-2011. Contrary to the neoclassical theory, we find that improvements in the external position foster growth. Our results are in line with current theoretical contributions explaining the Lucas Paradox where financial frictions are present. Within this framework, the general outcome should be a positive sign and the “neoclassical” negative relationship between net foreign assets and growth would be just a particular case, with no universal explanatory mechanism. Accordingly, we find that the effect of the net foreign asset position on growth is heterogeneous, the impact depending on the characteristics of the countries such as institutional quality, openness and financial development.

Investigating the Drivers of the Foreign Exchange Rate Volatility in the Asian Developing Countries (1995-2015)

The exchange rate policy considered as one of the most important macro-economic policy instruments, for it constitutes along with other policies an effective mechanism to protect the local economy from internal and external shocks. As a result, the importance of looking for the optimal model, which ensures internal and external balance, appeared and exchange rate is squeamish economic variable, especially in front of the great effect of the international trade on the economic development, and the international capital markets development. This paper is aimed to investigate the drivers of the Foreign Exchange Rate Fluctuations through giving international proof on 7 Asian developing countries, which are China, Korea, India, Pakistan, Philippines, Singapore, and Sri Lanka, and test the variables that can affect the exchange rate in this group of countries during 21 years from 1995 till 2015. The researcher use multiple linear regression analysis by GMM techniques that is a suitable estimator for not normally distributed samples. The model tested the impact of the independent variables, which are inflation rate, interest rate, GDP per capita, International reserve, public budget deficit, current account balance, government debt, FDI net inflow, and net foreign assets on the dependent variable, which is the exchange rate. The research shows that the only factor affects the exchange rate significantly in the Asian developing countries GDP per capita.

Short and Long Term Determinants of the Net International Investment Position Resulting from the Balance of Payments of the European Monetary Union Countries

The paper aims at analysing the level, composition and factors determining changes of the net international investment position (NIIP) of the euro area countries. Although the improvement in the euro area’s NIIP during the period from 2Q2012 to 2Q2016 was largely driven by current account surpluses in 13 out of 19 countries, there is a visible difference between the NIIP changes and their components in the surplus and deficit countries. The group of net foreign assets countries increased its position primarily by running current account surpluses reflecting mainly a positive balance on goods and, on a minor scale, a positive primary income balance. The NIIP in the group of net foreign liabilities countries deteriorated although the cumulative current accounts were in surplus for this period. Here, the current account improvement was largely driven by services which, in contrast to the net foreign asset countries, were in surplus. In turn, the cumulative primary income in the group of net foreign liabilities countries was in minus. Statistical analysis aimed at estimation of determinants of the changes in the NIIPs over the subsequent quarters shows that their short term behaviour was on a large scale positively driven by the changes of valuation effect resulting, for example, from exchange rates and prices movements. It should not be surprising that the signs which indicate the direction of valuation effect on the NIIP pattern are different in the short and long term. It should be stressed that the valuation effect influence decreases over time since valuation gains and losses overlap and largely neutralise each other. Nevertheless, combined losses were higher than total gains and therefore its impact on the NIIP was negative in the analysed period. On the other hand, the EMU current account surpluses were repetitive and persistent, being the main factor behind the improvement of the cumulative euro area NIIP changes.

The Long-Drawn Process of reform of the Exchange Rate Regime and the Evolution of China’s Exchange Rate Policy

ABSTRACTAn inflexible exchange rate not only brings the traditional problem of impossible trinity but also contributes to the formation of China’s irrational international balance of payments structure characterized by the so-called twin surpluses (current account and capital account surpluses). As a result, though China has some 2 trillion USD net foreign assets, it runs investment income deficits for more than a decade. Furthermore, when the RMB is under appreciation pressure, the inflexibility brings about inflows of hot money. When the RMB is under depreciation pressure, the inflexibility facilitates the unwinding of carry trade and capital flights. On the whole, China is too cautious in reforming its exchange rate regime. Instead of designing various cumbersome central parity rate-setting rules, China should make up its mind to float the RMB as soon as possible.

THE NONLINEAR NATURE OF COUNTRY RISK AND ITS IMPLICATIONS FOR DSGE MODELS

Country risk premia can substantially affect macroeconomic dynamics. We concentrate on one of their most important determinants—a country’s net foreign asset (NFA) position and—in contrast to the existing research—investigate its nonlinear link to risk premia. The importance of this particular nonlinearity is two-fold. First, it allows to identify the NFA level above which the elasticity becomes much (possibly dangerously) higher. Second, such a nonlinear relationship is a standard ingredient of dynamic stochastic general equilibrium (DSGE) models, but its proper calibration/estimation is missing. Our estimation shows that indeed the link is highly nonlinear and helps to identify the NFA position where the nonlinearity kicks in at approximately −70% to −75% of GDP. We also provide a proper calibration of the risk premium—NFA relationship which can be used in DSGE models and demonstrate that its slope matters significantly for economic dynamics in such a model.

International interest rates, the current account and housing markets

Current account deficits and housing prices showed a strong positive correlation throughout the mid-90s to 2007. This paper studies the effect of a decrease in the international interest rate and in the downpayment requirement to buy a house on the joint behavior of the current account and housing prices. To this end, I build an open economy model with life-cycle heterogeneous agents, tradable goods and housing. I calibrate the model to the U.S. economy and compute the transition after a decrease in the interest rate and in the downpayment. The model is able to match the boom and (qualitatively) the cooling down in the housing market without a reversal in the interest rate, the increase in the homeownership rate, the simultaneous boom followed by a decline in non-housing consumption, and the emergence of a negative net foreign asset position.