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Global Imbalances

Global Imbalances. Warwick J. McKibbin Center for Applied Macroeconomic Analysis (CAMA) RSPAS Australian National University &The Lowy Institute for International Policy & The Brookings Institution. Presentation at Oxford University, 16 May 2006 . Based on.

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Global Imbalances

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  1. Global Imbalances Warwick J. McKibbin Center for Applied Macroeconomic Analysis (CAMA) RSPAS Australian National University &The Lowy Institute for International Policy & The Brookings Institution Presentation at Oxford University, 16 May 2006

  2. Based on • Lee, McKibbin and Park (2006) “Transpacific Trade Imbalances: Causes and Cures” World Economy vol 29 • McKibbin and Stoeckel (2005) The United States current account deficits and world markets www.economicscenarios.com • Forthcoming paper with Jong-Wha Lee on “Global Imbalances” • McKibbin (2006) “The Global Macroeconomic Consequences of a Demogrphic Transition” Asian Economic Papers, MIT Press

  3. Overview • What are the macroeconomic imbalances? • Sources of current account imbalances • Quantifying Possible policies and shocks that can affect current accounts • The Role of Demographics • Summary and Conclusion

  4. Two Aspects of Global Imbalances • Global Savings in excess of global investment which shows up as low long term real interest rates • National savings and investment imbalances which show up as current account imbalances between countries • Countries with national savings greater than national investment run current account surpluses • Countries with national investment greater than national savings run current account deficits

  5. Global Current accounts

  6. Number of Real Factors and not a Single cause • Pull • US fiscal deficits • Decline in household saving • Strong productivity growth • Push • Decline in Asian investment rates (except China) • Rising corporate and household saving in China • Oil revenue recycling by Oil Exporters

  7. Change in Asian Current accounts • Large fall in Investment except China • Rise in Chinese corporate and household savings

  8. Implication of various shocks for Current accounts Using the G-Cubed (Asia Pacific Model)

  9. Types of Structural Global Models

  10. G-Cubed (Asia Pacific) Model • Estimated dynamic intertemporal model with Keynesian short-run rigidities • Adjustment costs in capital accumulation • Financial capital mobile given risk premia • Wages adjust slowly given labour market rigidities • Financial markets for equity, bonds, money • Mix of intertemporal optimizing and rule of thumb decision rules • Imposition of intertemporal budget contraints

  11. Countries • United States Japan • United Kingdom Europe • Canada Australia • New Zealand • China India • Korea Taiwan • Singapore Hong Kong • Malaysia Thailand • Indonesia Philippines • Oil Exporting Developing Countries • Eastern Europe and the former Soviet Union • Other Developing Countries

  12. Sectors • Energy • Mining • Agriculture • Durable Manufacturing • Non-Durable Manufacturing • Services

  13. Simulations • Sustained fall in Asian Investment • rise in equity risk premia of 2% in Indonesia, 1% in non Japan/non China Asia; 0.5% in Japan; fall of 0.5% in China • Permanent US fiscal expansion financed by debt • Rise of 4% of GDP fiscal deficit • 1% of GDP on Goods/services • 1% of GDP on labor • 2% of GDP of income tax cuts • Revaluation of East Asian Exchange Rates of 10% • Fiscal Stimulus in non-Japan Asia • 2% of GDP comprising 1% GDP goods/ services and 1% GDP on labor

  14. Adjustment Story: Asian Investment Decline • Rise in equity risk premium implies rate of return on capital must rise above other assets • Capital stock must fall to generate the higher return • Investment declines • Portfolio holders substitute out of equities into bonds (r falls), into housing (housing prices rise) and into foreign assets (capital outflow) • Real exchange rate depreciates and GDP falls • raising exports and lowering imports • Consistent with excess savings relative to investment • Current account improves

  15. Source: G-Cubed Asia Pacific Model version 58n

  16. Adjustment Story: US Fiscal Policy • Basic Mundell-Fleming story except intertemporal overlay and asset adjustment • Higher spending/lower taxes initially raises GDP but over time GDP falls as resources are extracted from the private sector to finance the fiscal deficit • Partial Ricardian adjustment in Consumption but long term real interest rates rise to free up resources from the private sector to finance the deficit • Net capital inflow which initially appreciates the US real exchange rate • Exports fall, imports rise

  17. Adjustment Story: US Fiscal Policy • Investment rises initially but then falls, private saving rises but total savings falls by more than investment • US Current account deteriorates • High long term real interest rates lowers global investment improving Asian current accounts

  18. Source: G-Cubed Asia Pacific Model version 58n

  19. Adjustment Story: East Asia Revaluation • Monetary policy regimes differ across countries • Fixed exchange rates in China and Hong Kong • Other countries follow a modified Henderson-McKibbin Rule with an additional weight on a desired nominal exchange rate relative to the $US • Shock is a change in the desired bilateral rate with the $US.

  20. Adjustment Story: East Asia Revaluation • Real exchange rate initially appreciates • Over time prices rise less quickly and the real exchange eventually returns to base • GDP in appreciating countries fall relative to base • Chinese GDP falls relative to base by 4% in the first year • Exports less competitive but domestic slowdown reduces imports • Trade balance worsens slightly • GDP in other countries ambiguous depending on competition with China and East Asia versus fall in Asian demand from trading partners • Overall impact on US/Asia trade balances is small

  21. Source: G-Cubed Asia Pacific Model version 58n

  22. Source: G-Cubed Asia Pacific Model version 58n

  23. Adjustment Story: Asian Fiscal Stimulus • Similar story to US policy except partial exchange rate targeting in some countries causes larger rises in GDP in Asia • Less impact on long term real interest rates because of economic size and less crowding out of foreign investment • Capital flows in to finance the fiscal deficit • Real exchange rate appreciation • Trade balance deteriorates

  24. Source: G-Cubed Asia Pacific Model version 58n

  25. Source: G-Cubed Asia Pacific Model version 58n

  26. Conclusions of first paper on causes • Predominant contribution to the transpacific trade imbalance is US fiscal policy • Weak Asian investment since the 97 Crisis also important for the Asian trade surpluses but less important for the transpacific balance • US fiscal contraction and Asian fiscal expansion plus a recovery in Asian investment rates would have a significant impact on reducing each country’s overall trade position and would also reduce the Transpacific trade imbalance

  27. Conclusions • East Asia exchange rate revaluation has significant effects on slowing East Asia for a year but not in changing global trade balances • The worsening in East Asian competitiveness plus weaker East Asian growth tends to offset each other in the spillover to other countries and have a minor impact on the relative saving and investment balances across the region.

  28. Additional Simulations – what else might happen?(based on McKibbin and Stoeckel (2005) • Rise in US Household savings due to an exogenous fall in consumption (1% of GDP) • Fall in US fiscal deficit to balance over 4 years • Investor confidence in Asia Restored • Stronger growth in China due to higher TFP (1% per year for 10 years) • Stronger growth in Europe due to higher TFP (1% per year for 10 years)

  29. Is there a demographic story behind the imbalances?

  30. The Global Macroeconomic Consequences of a Demographic Transition Warwick J McKibbin Centre for Applied Macroeconomic Analysis, RSPAS, ANU; Lowy Institute for International Policy, Sydney The Brookings Institution, Washington DC; Prepared for a seminar at the Bank of Korea, Seoul Wednesday May 10 2006

  31. Figure 12: Contribution to Current Accounts of Own versus Global Demographic Change

  32. Overall Conclusion • US current account deficit and corresponding current account surpluses in other countries caused by a variety of factors that affect • Savings and investment changes in the United States China, East Asia and rest of world • Exchange rate policy has little to do with changing current account balances which reflect real rather than monetary factors • This is unlikely to be a solution (especially for China) because it has minor effect on US savings and investment

  33. Background Papers www.sensiblepolicy.com www.gcubed.com

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