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on Open MacroEconomics |
| By: | Claudio Borio; Piti Disyatat |
| Abstract: | Global current account imbalances have been at the forefront of policy debates over the past few years. Many observers have recently singled them out as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have helped fuel the credit booms and risk-taking in the major advanced deficit countries at the core of the crisis, by putting significant downward pressure on world interest rates and/or by simply financing the booms in those countries (the "excess saving" view). We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems: (i) drawing inferences about a country's cross-border financing activity based on observations of net capital flows; and (ii) explaining market interest rates through the saving-investment framework. We trace the shortcomings of this perspective to a failure to consider the distinguishing characteristics of a monetary economy. We conjecture that the main contributing factor to the financial crisis was not "excess saving" but the "excess elasticity" of the international monetary and financial system: the monetary and financial regimes in place failed to restrain the build-up of unsustainable credit and asset price booms ("financial imbalances"). Credit creation, a defining feature of a monetary economy, plays a key role in this story. |
| Keywords: | global imbalances, saving glut, money, credit, capital flows, current account, interest rates, financial crisis |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:346&r=opm |
| By: | Cavalcanti, T.V.de V.; Mohaddes, K.; Raissi, M. |
| Abstract: | This paper studies the impact of the level and volatility of commodity terms of trade on economic growth, as well as on the three main growth channels: total factor productivity, physical capital accumulation, and human capital acquisition. We argue that volatility, rather than abundance per se, drives the "resource curse" paradox and also investigate empirically whether export diversification of commodity dependent countries contribute to faster growth. We use the standard system GMM approach as well as an augmented version of the pooled mean group (PMG) methodology of Pesaran et al. (1999) for estimation. The latter takes account of cross-country heterogeneity and cross-sectional dependence, while the former controls for biases associated with simultaneity and unobserved country-specific effects. Using both annual data for 1970-2007 and five-year non-overlapping observations, we find that while commodity terms of trade growth enhances real output per capita, volatility exerts a negative impact on economic growth operating mainly through lower accumulation of physical capital. Our results indicate that the negative growth effects of CTOT volatility offset the positive impact of commodity booms. |
| Keywords: | Growth, resource curse, commodity prices, volatility |
| JEL: | C23 F43 O13 O40 |
| Date: | 2011–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1112&r=opm |
| By: | Filipa Sá (University of Cambridge); Francesca Viani (Banco de España) |
| Abstract: | Reversals in capital inflows can have severe economic consequences. This paper develops a dynamic general equilibrium model to analyse the effect on interest rates, asset prices, investment, consumption, output, the exchange rate and the current account of a shift in portfolio preferences of foreign investors. The model has two countries and two asset classes (equities and bonds). It is characterised by imperfect substitutability between assets and allows for endogenous adjustment in interest rates and asset prices. Therefore, it accounts for capital gains arising from equity price movements, in addition to valuation effects caused by changes in the exchange rate. To illustrate the mechanics of the model, we calibrate it to analyse the consequences of an increase in the importance of sovereign wealth funds (SWFs). Specifically, we ask what would happen if ‘excess’ reserves held by emerging markets were transferred from central banks to SWFs. We look separately at two diversification paths: one in which SWFs keep the same allocation across bonds and equities as central banks, but move away from dollar assets (path 1); and another in which they choose the same currency composition as central banks, but shift from US bonds to US equities (path 2). In path 1, the dollar depreciates and US net debt falls on impact and increases in the long run. In path 2, the dollar depreciates and US net debt increases in the long run. In both cases, there is a reduction in the ‘exorbitant privilege’, ie, the excess return the United States receives on its assets over what it pays on its liabilities. The model is applicable to other episodes in which foreign investors change the composition of their portfolios. |
| Keywords: | portfolio preferences, sudden stops, imperfect substitutability, global imbalances, sovereign wealth funds |
| JEL: | F32 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1112&r=opm |
| By: | Liu, Philip (International Monetary Fund); Mumtaz, Haroon (Bank of England); Theophilopoulou, Angeliki (University of Westminister) |
| Abstract: | A growing literature has documented changes to the dynamics of key macroeconomic variables in industrialised countries and highlighted the possibility that these variables may react differently to structural shocks over time. However, existing empirical work on the international transmission of shocks largely abstracts from the possibility of changes to the international transmission mechanism across time. In addition, the literature has largely employed small-scale models with limited number of variables. This paper introduces an empirical model which allows the estimation of time-varying response of a large set of domestic variables to foreign money supply, demand and supply shocks. The key results show that a foreign monetary policy tightening resembles the classic beggar-thy-neighbour scenario for the United Kingdom in the period 1975-90. In more recent periods, the response is negative but largely insignificant. |
| Keywords: | Factor augmented VAR; Time-variation; Gibbs sampling. |
| Date: | 2011–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0425&r=opm |