Net International Investment Position Research Articles

Measuring external macroeconomic imbalances and competitiveness in the Republic of Moldova

In the context of frequent crises and multiple vulnerabilities faced by the Republic of Moldova, increasing competitiveness of the national economy has become an imperative for strengthening the resilience to external shocks. As a result, it is necessary to adopt a set of indicators that would allow a proper analysis of economic trends, ensure early warning of crises, and serve as signals for activating protection mechanisms in case of external shocks. In line with this concept, the author aimed to analyze international experience in this field and to extrapolate external practices to the national context. Thus, the author analyzed the set of indicators used in the European Union to identify and monitor external macroeconomic imbalances and competitiveness, and, subsequently, calculated the same variables based on data for the Republic of Moldova. The results of this exercise indicate the existence of a number of acute macroeconomic imbalances in the Republic of Moldova, which are of a chronic nature, such as: negative current account, net international investment position, accelerated growth of unit labor costs, and rapid appreciation of the Real Effective Exchange Rate. This situation, in turn, contributes to the widening of Moldova`s specific competitiveness deficit.

La Balanza de Pagos y la Posición de Inversión Internacional de España en 2023

Rationale The balance of payments and international investment position provide insight into Spain’s economic relations with the rest of the world, which have important implications for the domestic economy. Analysis of these statistics takes on added significance against a backdrop of global uncertainty. Takeaways •In 2023 the Spanish economy’s net lending as a percentage of GDP reached its highest level since 1995, driven by the improvement in the trade balance and positive developments in services, with record high credits in both travel services and other services. •The negative net international investment position declined further in 2023 to stand at 52.8% of GDP (its lowest level in 19 years), as a result of GDP growth and the positive balance of financial transactions with the rest of the world. •Spain’s outward and inward foreign direct investment positions increased in 2023 due to the positive amount of financial transactions, although these were down slightly on the previous year, and the likewise positive amount of revaluations.

External wealth of nations and systemic risk

External imbalances played a pivotal role leading to the global financial crisis and were an important cause of turmoil. While current account (flow) imbalances narrowed in the aftermath of the crisis, the net international investment position (NIIP) (stock) imbalances persisted. This study explores the implications of countries’ net foreign positions on systemic risk. Using a sample of 470 banks located in 49 advanced economies, emerging countries, and developing economies over 2000–2020, we find robust empirical evidence that banks can reduce their systemic risk exposure when the countries in which they are incorporated improve their NIIPs and maintain creditor status vis-à-vis the rest of the world. However, only the equity component of the NIIP is responsible for this outcome, whereas debt flows are not significant. Similarly, we find that the mitigating effect of an external balance sheet on systemic risk is derived from valuation gains rather than from the incremental net acquisition of assets or liabilities represented by the current account. Our findings are particularly relevant for policymakers seeking to improve banks’ resilience to adverse shocks and maintain financial stability.

The Shock Absorbing Role of Cross-border Investments: Net Positions Versus Currency Composition

We present a comprehensive analysis of the shock absorption role of external positions using the currency exposures dataset by Bénétrix et al. (2020). While the literature has frequently studied how the net international investment position and its currency composition determine the direction and scale of valuation effects, we focus on their amplitude. This is of central importance for global financial stability given the large and increasing scale of external balance sheets. To that end, we propose an indicator showing the extent to which external positions absorb or amplify exchange rate shocks. Analysing a set of 50 countries over the period 1990-2017, we find the external shock absorption role to be present for advanced economies, while this was initially not the case for emerging markets economies (EMEs). In recent years, however, EMEs’ external positions increasingly showed a shock absorption capacity. Our regression-based analysis reveals that the level of economic and financial development is associated with a greater capacity to absorb exchange rate shocks.

La Balanza de Pagos y la Posición de Inversión Internacional de España en 2022

Rationale The balance of payments and international investment position (IIP) are important because of the information they provide on economic relations with the rest of the world, which affect the national economy. Their analysis is of even greater interest in the light of recent events, such as the war in Ukraine and its impact on energy prices. Takeaways •In 2022 the Spanish economy’s net lending fell, owing largely to the deterioration in the energy trade balance. The services balance performed favourably, particularly in the case of travel services, which returned to pre-pandemic levels. •The negative net IIP continued to correct in 2022, standing at 60.5% of GDP, the lowest level in 18 years, thanks to GDP growth, the positive amount of financial transactions with the rest of the world and positive valuation effects. •Spain’s outward foreign direct investment and inward foreign investment in Spain recovered their pre-pandemic levels, with a notably strong performance by the non-financial corporations sector.

The Effectiveness of CAPM and Fama-French Three-Factor Models in Healthcare and Real Estate Industries

As the world’s largest economy and an important hub for cross-border capital flows, monetary policy adjustments in the U.S. will affect the cross-border capital flows and the structure of net international investment positions. From the 1990s to the present, the U.S. has experienced four rounds of interest rate hike cycles as domestic inflationary pressures fluctuate. In this paper, we analyze the changes of KML, SMB, HML and other factors of the stocks of leading companies in the medical and real estate industries based on regression analysis. Specifically, to investigate the applicability of the CAPM model and FF3 model in the medical and real estate industries in the context of the Fed's interest rate hikes, we construct regression models and fit the corresponding coefficients in the CAPM model and FF3 model, respectively. According to the analysis, the FF3 model has a better performance in most cases and can better explain the impact of the Fed's interest rate hike on the healthcare and real estate sectors compared to the CAPM model. On this basis, it can still be used as an effective tool for asset valuation and resource allocation after the Fed's interest rate hike. These results shed light on guiding further exploration on asset pricing.

Порівняльний аналіз зовнішньоекономічних позицій Аргентини та Бразилії

The article examines the peculiarities of the transformation of the foreign economic positions of the countries of South America on the example of Argentina and Brazil. The analysis showed that during the entire considered period of 2016-2021, Argentina's net international investment position is positive, while Brazil's is negative. In order to investigate whether Brazil has a double deficit problem, a vector autoregression was constructed. The simulation results showed that the hypothesis of a relationship between the budget deficit and Brazil's current account from 1996 to 2021 is not confirmed. Therefore, there is no double deficit problem in Brazil, budget and current account deficits are not causes of each other's deficit.

Forecasting the net investment position based on conventional and ESG stock market indices: The case of Ukraine and Austria

This paper examines the relationship between traditional and ESG stock market indices and the net international investment position for the case of Austria and Ukraine. For these purposes, the following methods are used: variance analysis, ANOVA analysis, correlation analysis, VAR analysis, R/S analysis, and Granger causality test. According to the results, ESG indices are less volatile than conventional ones. Based on the correlation analysis, it is concluded that there is a significant direct connection between ESG indices and their traditional counterparts (0.98 for Austria and 0.68 for Ukraine). A substantial level of persistence in Austria’s investment position indicates the possibility of using autoregression models for forecasting. The results of the net investment position modelling for the case of Austria showed a statistically significant impact of stock market indices on the net investment position. But for the case of Ukraine, this impact is insignificant. This is indirect evidence in favor of poor performance of the Ukrainian stock market. Further development of Ukrainian stock market is required, because Austrian experience showed that stock market can be used as a transmission mechanism in boosting investment position both within conventional approach and ESG. Acknowledgment Alex Plastun, Mario Situm, Inna Makarenko, and Yulia Serpeninova gratefully acknowledge support from Ministry of Education and Science of Ukraine (0122U002659).

External Balance Sheets and the COVID-19 Crisis

At the onset of the COVID-19 economic crisis, as in other crisis episodes, we observed a rapid appreciation of “safe haven” currencies. We quantify currency-induced balance sheet valuation effects for aggregate external positions as well as for broadly defined asset classes for the first quarter and the full year 2020. To do so, we use new data on the currency composition of cross-border assets and liabilities for 46 countries. In contrast with past financial crises, many emerging markets did not experience losses on their aggregate external balance sheets despite facing a domestic currency depreciation. This was partly due to currency-induced valuation gains on equity positions offsetting losses on debt positions, and partly due to reduced currency mismatch on their external debt positions. We conduct the stock-flow reconciliation of net international investment positions to measure overall valuation effects and compute the proportion that is due to changes in currency values. For about half of the countries in our sample, currency-induced valuation effects were substantial, representing over 50 percent of total valuation effects in 2020Q1 and the full year 2020.

Net investment position and the stock market: The case of traditional and ESG indices

This paper explores the influence of traditional and ESG stock market indices on a country’s net international investment position. To do this, different methods, including ANOVA analysis, multiply regression analysis, correlation analysis, VAR-analysis and R/S-analysis, as well as the Granger causality test, are applied to quarterly data on the net international investment position, traditional and ESG indices from Finland, Sweden, France, Spain and Ukraine over the period 2005–2021. The results of descriptive statistics show that ESG indices are more volatile than traditional, but these differences are statistically insignificant according to ANOVA analysis. Correlation analysis provides direct evidence that ESG indices are highly correlated with their traditional analogues (correlation level varies from 0.88 to 0.96). Regression analysis results show that traditional and ESG stock market indices have no significant impact on the net international investment position. ESG stock market indices and net international investment position data are persistent, and autoregressive models can be applied to these data sets. On average, Hurst exponent is above 0.75 for the case of ESG indices and above 0.85 for the net investment position. This paper provides recommendations to improve the responsible investment framework. Acknowledgment Alex Plastun gratefully acknowledges financial support from the Ministry of Education and Science of Ukraine (0121U100473).

Глобальные дисбалансы: эволюция подходов

The article examines the current state and causes of global imbalances’ sustainability – the phenomenon whereby some major systemic countries run large and persistent current account deficits, which are mirrored by large surpluses in a number of other countries. The widening of global imbalances during COVID 19 pandemic contrasts with their dynamics during previous global downturns, when the scale of imbalances narrowed. The article analyzes various explanations of global imbalances: intertemporal choice with a difference in the rates of return, demographic changes, global savings glut, dynamics of oil prices, exchange rate manipulations, twin deficits, demand for safe assets. The significance of each of the causes of global imbalances changes over time, and currently fiscal policy has been playing an increasing role to determine the movements of current account deficits. The global fiscal response to the pandemic, especially in advanced economies, has been unprecedented, which led to significant reduction in government savings. The scale and dynamics of global imbalances are largely determined by the state of the US balance of payments: it is a reflection of the ability to generate safe assets and to finance trade and budget deficits cheaply by using the dollar’s status as the dominant world currency. There are differences in theoretical approaches regarding the macroeconomic effects of global imbalances. But persistent current account deficits and surpluses lead to accumulation of stock imbalances – the difference between countries’ foreign assets and liabilities. The ongoing negative changes in the net international investment positions of many leading advanced economies indicate an increase in external indebtedness. This creates risks to both debtor and creditor countries and threatens the stability of the global financial system.

Financial Development and Macroeconomic Performance: A Cointegration Approach

The paper tests the existence of long-term relations between all the IMF financial development indices and some macroeconomic performance indicators applying panel cointegration tests in a panel with 46 countries, and in a panel including only the sub-sample of the 27 EU countries over the interval 1990-2019. Overall, there are no significant differences between the results obtained for the whole sample and the panel including only the EU countries. The results obtained clearly point to the existence of cointegration between the financial development indices and the real Gross Domestic Product, as well as with the inflation, the unemployment rate, the current account, and the net international investment position. The results also show that there are no significant differences between the results obtained for the financial institutions and for the financial markets indices. Moreover, the results related to the specific aspects addressed by the IMF indices very well demonstrate that much more important than the simple access to or the depth of the financial institutions and markets is the efficiency of these institutions and markets.

Probabilistic assessment of external sustainability in Portugal

Portugal is one of the most externally indebted economies in the eurozone. The deeply negative net international investment position (NIIP) suggests that large current account surpluses will be needed in the future to restore external sustainability. Despite significant interest in the scope for external adjustment within a monetary union, little is known about the magnitude or likelihood of the relative price change required to facilitate this adjustment. Drawing on a new probabilistic framework of external sustainability, this paper estimates the likelihood that a real effective depreciation is needed to lower Portugal’s net external liabilities to more prudent levels. Contrary to conventional thinking, we find that the NIIP is sustainable without real depreciation with fairly high probability, estimated between 32 and 43 percent. We highlight the predominance of financial account shocks over current account shocks in this assessment. To provide context to the assessment, we also apply the framework to Ireland. Despite a weaker NIIP than in Portugal, the probability that the external position is sustainable in Ireland is higher, estimated between 54 and 60 percent, predominantly reflecting forecasts of large and sustained trade surpluses.Supplementary informationThe online version contains supplementary material available at 10.1007/s10258-021-00201-y.

U.S. Housing as a Global Safe Asset: Evidence from China Shocks

<ns2:p>This paper demonstrates that the measured stock of China's holding of U.S. assets could be much higher than indicated by the U.S. net international investment position data due to unrecorded historical Chinese in ows into an increasingly popular global safe haven asset: U.S. residential real estate. We first use aggregate capital ows data to show that the increase in unrecorded capital in ows in the U.S. balance of payment accounts over the past decade is mainly linked to in ows from China into U.S. housing markets. Then, using a unique web traffic dataset that provides a direct measure of Chinese demand for U.S. housing at the zip code level, we estimate via a difference-in-difference matching framework that house prices in major U.S. cities that are highly exposed to demand from China have on average grown 7 percentage points faster than similar neighborhoods with low exposure over the period 2010-2016. These average excess price growth gaps co-move closely with macro-level measures of U.S. capital in ows from China, and tend to widen following periods of economic stress in China, suggesting that Chinese households view U.S. housing as a safe haven asset.</ns2:p>

Assessing the euro area current account

This paper assesses the determinants of the evolution of the euro area current account against the benchmark provided by the empirical model in the Coutinho et al. (2018). The paper analyses what part of the current account can be explained by fundamental drivers (current account norms) for the euro area aggregate and for the largest five euro area economies. In addition, it attempts to make a step forward compared with traditional empirical current account specifications in two respects. First, in light of the growing stock imbalances across the euro area embodied by the net international investment position (NIIP), a different specification of current account norms is proposed for their computation, where the part of the NIIP that is explained by fundamental drivers is taken into account. Second, alternative specifications of the empirical model are estimated to better capture the impact of financial centres and corporate net savings, which have been playing an increasingly relevant role in shaping current account outturns in a number of euro area countries in recent decades. Results indicate that while the euro area current account has been in line with fundamentals until the great financial crisis, its post-crisis widening partly reflects private and public deleveraging. Accounting for NIIPs and corporate net savings contributes to moderately reduce the gap between the euro area current account and the norm.

Fiscal and exchange rate policies drive trade imbalances: New estimates

A 2017 analysis found that fiscal balances and foreign exchange intervention are the most important observable factors behind differences in current account balances across countries and over time (Gagnon 2017). This paper updates that analysis with three more years (2016–18) and roughly 40 percent more observations. The original findings are found to be robust to alternative estimation techniques, auxiliary variables, and sample restrictions. New analysis of net international investment positions (which largely reflect cumulated current account balances) finds even stronger evidence for the dominant role of official reserve positions in explaining differences across countries. An increase in a country’s official reserve position causes essentially a dollar-for-dollar increase in its net investment position.

МАКРОЕКОНОМІЧНІ ДИСБАЛАНСИ В УКРАЇНІ: МОНІТОРИНГ НА ОСНОВІ MIP SCOREBOARD ТА МОДЕЛЬНІ ОЦІНКИ ЇХНЬОГО ВПЛИВУ НА ЗРОСТАННЯ І СТАБІЛЬНІСТЬ

Серед гострих проблем розвитку світової економіки розглянуто проблему ідентифікації та моніторингу макроекономічних дисбалансів, що упродовж останніх десятиліть особливо актуальні для країн, різних за розміром, географічним положенням та роллю в геополітиці. Для України, що обрала європейський шлях розвитку, апробація європейської методики визначення дисбалансів є одним із домашніх завдань, яке передбачає розбудову системи заходів мікро- та макропруденційної політик, що можуть ослабити негативний вплив наявних дисбалансів і попередити появу нових.
 У контексті необхідності вчасного виявлення макродисбалансів, які гальмують економічну динаміку і призводять до розгортання фінансово-економічних криз в Україні, наукова новизна дослідження полягає у здійсненні аналітичної та кількісної оцінки масштабів нагромаджених у вітчизняній економіці зовнішніх і внутрішніх дисбалансів та емпіричній перевірці гіпотез щодо їхнього негативного впливу на темпи економічного зростання та стабільність.
 На основі європейської процедури макроекономічного дисбалансу «Тhe Macroeconomic Imbalance Procedure» (MIP Scoreboard) проведено аналіз динаміки основних індикаторів, які засвідчили наявність дисбалансів у зовнішній і внутрішній сферах, на ринку праці України. Зокрема, на тривалий характер дисбалансів вказує моніторинг показників: сальдо поточного рахунку, чистої інвестиційної позиції, ринкової частки експорту країни, реального ефективного курсу гривні, боргу сектору державного управління, безробіття серед молоді.
 Проведено регресійний аналіз і на часовому проміжку 2001—2018 рр. побудовано ряд моделей, які підтвердили наявність статистичного впливу динаміки показників, що є основними індикаторами дисбалансів у MIP Scoreboard, на темпи економічного зростання в Україні. Реалізація та прогнозні оцінки пробіт-моделі підтвердили високу ймовірність настання кризи у короткостроковій перспективі внаслідок нагромаджених і формування нових дисбалансів у різних сферах економіки України, що є загрозливим, оскільки це може призвести до зниження конкурентоспроможності країни та фінансової нестабільності.
 Наголошено на необхідності розроблення і впровадження в українську практику моніторингу MIP Scoreboard з урахуванням національної специфіки для раннього виявлення загроз стабільності та своєчасного попередження кризових ситуацій, оскільки накопичені проблеми, окрім негативного впливу на економічну динаміку, можуть також мати й негативні соціально-політичні наслідки.

Tax incentives for innovation in the context of macroeconomic stability: an analysis of causality

The article deals with the topical issue of R&D tax incentives and their impact on the level of innovation development and macroeconomic stability. The research is based on causality analysis and estimation of the strength, time lags and directions of mutual influence of R&D tax incentives and macro indicators. Systematization literary sources and approaches for solving this problem indicates that R&D tax incentives are studied in fragments in the context of macroeconomic stability. The research's main purpose is to improve the methodological bases of substantiation of the choice of relevant instruments of innovation stimulation considering causal relations of R&D tax incentives and macro indicators. The paper presents the results of dynamic analysis of R&D tax incentives in 13 European countries, for which OECD statistics for 2007-2017 are freely available. The significance, strength, and nature of the relationship between these indicators and the following macro indicators are determined: the level of the country's innovation development, the share of investment in GDP (in general and in the corporate sector in particular), net international investment position, the share of the business sector in the cost structure of R&D. Pearson and Spearman correlation coefficients were calculated depending on the variable subordination to the law of normal distribution (verified by the Shapiro – Wilk test) on the admissible calculation interval taking into account time lags from 0 years to 3 years. The causality of the studied indicators was established using the Granger causality test. The calculations are important for the prioritization of instruments for the implementation of innovation support. The highest priority should be given to the establishment of tax incentives for R&D, as this tool's impact on all studied macro indicators in most countries was direct. Its effect was manifested in the shortest possible time (with a lag of 0-3 years). The second priority should be given to setting hidden rates of business tax subsidies on R&D, as this indicator's impact on most of the studied indicators was statistically significant and direct with a time lag of 0–3 years. The paper substantiates the inefficiency of direct public financial support, as the impact of this indicator on most of the analyzed macro-indicators was reversed with a lag of 0–2 years. Thus, it is more expedient for the state to help entrepreneurs by providing tax benefits to provide innovation development and macro stability than through direct reimbursement of costs. Moreover, lag regression models were built for those countries where identified links were the most important (Belgium, Denmark, the Netherlands, and the Czech Republic). They take into account inflation rates and interest rates on long-term liabilities and the number of labour resources in the country as control variables.

On Increasing the Market Value of Fixed Capital in Russia

The article compares the market value of Russian and American fixed capital in general and by type of economic activity. The multiple backlog of Russia in specific and especially in gross indicators is shown. The required investment (based on PPP for investment in fixed assets) necessary to bring the capital/labor ratio of the workplace in the Russian Federation up to the level of the United States in the economy as a whole and its sectors, the impact of more active implementation of the investment program on the Russian employment structure is calculated. The potential of reducing the net international investment position of the Russian Federation and restructuring of monetary policy as factors in the activation of the investment process is considered.

The role of stock-flow adjustment during the global financial crisis

While the recent contraction of current account imbalances that followed the Global Financial Crisis is well documented, this paper analyzes the increasing divergence of net international investment positions in the post-crisis period. Decomposing the change in the net international investment position into capital flows and stock-flow adjustment, I find that the increasing stock imbalances are driven by the flows. However, stock-flow adjustments show a stabilizing pattern. Countries with the largest net foreign liabilities experienced the greatest valuation gains. Analyzing this effect by different asset classes shows that this stabilizing pattern was driven by a change in the value of portfolio equity. The pro-cyclical movement of domestic stock markets during the post-crisis period improved international risk sharing through foreign portfolio equity liabilities.