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Topic 1: Current account
determination
Balance of payments accounting
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FRBNY article, June 2004
BEA international statistics (www.bea.gov)
FRB Bulletin, May 2003
Any intermediate macroeconomics
textbook
Net external liabilities
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Current account deficits cumulate to net
external liabilities
See www.bea.gov/bea/newsrel/intinvnewsrelease.htm
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Focus on gross and net positions
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Net International Investment Position of
the United States at Year end, 1989 –
2007
See:
http://www.bea.gov/international/xls/intinv07_t2.xls
U.S. NIIP 2007
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NIIP at year end: about -$2.5 trillion (with
FDI at current cost)
US-owned assets abroad $17.6 trillion
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Foreign securities $6.6 trillion
US FDI abroad $3.93 trillion
Bank claims $3.8 trillion
Foreign-owned assets in US: $20.1 trillion
Revaluation effects
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Price changes: Greater share of FDI and
portfolio equities in US assets than in US
liabilities
Exchange rate changes: US liabilities
largely denominated/priced in dollars,
while US assets mostly denominated in
foreign currency
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Net liabilities decline when dollar depreciates
Exchange rate changes
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About two-thirds of US assets
denominated in foreign currency
10 percent depreciation in dollar  $1200
billion  dollar value of gross US assets
Equivalent to roughly 7 percent of GDP
Lowers net payments on NIIP by
0.28 percent of GDP (.04  7%)
Factors driving global
imbalances
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Two main views
“Trade-flows” versus “Capital-flows” view
Does the trade flows drive capital flows or
vice-versa?
Trade-flows view
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Elasticities approach to trade
See: Hooper, Johnson, and Marquez
(1998), Chinn (2005)
Idea: Relate trade flows to relative prices
and importer income
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Income: GDP or domestic demand
Relative prices: real trade-weighted (effective)
exchange rate
Trade equations
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All variables in logs
Xt = Y*t + 1Rt-1 + 2Rt-2
Mt = Yt + 1Rt-1 + 2Rt-2
where:
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X = real exports
M = real (non-oil) imports
Y = Domestic income; Y*= Foreign income
R = Real effective exchange rate
Source: Chinn 2005
Empirical results for the US
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Good statistical fit
>>0
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Houthakker-Magee asymmetry
Implication: with constant prices and equal
U.S. and foreign income growth, U.S. trade
deficit widens
’s and ’s small
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In part reflecting incomplete pass-through
U.S. trade deficit
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U.S. economy has been outperformed
major trading partners 1997-2006
Real dollar appreciated sharply from 1996
to 2001; depreciated since 2002
Gap between imports and exports now so
large that a marked acceleration in exports
is needed to close trade deficit
U.S. trade deficit
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Partial equilibrium: trade deficit drives
financial flows
General equilibrium: if ex-ante trade and
financial flows differ, then the real
exchange rate adjusts to equate the expost flows