Download G-Cubed (Asia Pacific) Model

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
• 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
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
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
Current Accounts
($US Billion)
400
200
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Middle East
Japan
United States
China
NICs
ASEAN-4
-200
-400
-600
-800
-1000
International Monetary Fund, World Economic Outlook Database, April 2006
Current Accounts
(%GDP)
Global
Current accounts
25
20
15
Middle East
Japan
United States
China
NICs
ASEAN-4
10
5
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-5
-10
International Monetary Fund, World Economic Outlook Database, April 2006
2005
2006
Number of Real Factors and not a Single cause
• Pull
– US fiscal deficits
– Decline in household saving
– Strong productivity growth
• Push
– Decline in Asian investment rates (except China)
– Rising corporate and household saving in China
– Oil revenue recycling by Oil Exporters
1
Main drivers behind the decline in current account balance in the
United States
Boom collapses
US dot com inv estment boom
0
-100
US fiscal deficit and
-200
public dissav ing, low
US$ billion ...
-300
personal sav ing rates
-400
-500
-600
Asian financial crisis and
-700
-800
loss of inv estor confidence
Japanese inv estment slump
-900
1991
1993
1995
1997
1999
Source: OECD Economic Outlook No. 76, December 2004
2001
2003
2005
US Personal Savings Rate
9
8
7
6
5
4
3
2
1
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
US Fiscal Balance
(%GDP)
2
1
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-1
-2
-3
-4
-5
-6
-7
Source: IMF WEO database 2005
Current Accounts
(%GDP)
10
8
6
4
United States
China
NICs
ASEAN-4
2
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-2
-4
-6
-8
International Monetary Fund, World Economic Outlook Database, April 2006
2005
2006
Investment
50
45
40
35
%GDP
30
25
20
15
10
5
0
1995
1996
1997
Malaysia
1998
1999
Indonesia
2000
Thailand
2001
Korea
2002
2003
Change in Asian Current accounts
• Large fall in Investment except China
• Rise in Chinese corporate and household savings
Implication of various shocks for Current
accounts
Using the G-Cubed (Asia Pacific Model)
Types of Structural Global Models
Structural Global
Models
Input/Output
Models
Computable General Equilibrium
Models (CGE)
Models
Dynamic Intertemporal General Equilibrium
Models
Old Style Macroeconometric
Models
1960s/70s
Modern Macroeconometric Models
1980s/90s
Stochastic Dynamic General Equilibrium
Models
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
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
Sectors
•
•
•
•
•
•
Energy
Mining
Agriculture
Durable Manufacturing
Non-Durable Manufacturing
Services
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
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
Table 7: Change in Current Account/GDP as a results of various shocks
(%point deviation from baseline)
year 1
year 5
year 10
Asian Investment Decline
USA
-0.19
-0.30
-0.35
Japan
0.87
1.15
1.30
Canada
-0.26
-0.41
-0.48
Australia
-0.22
-0.46
-0.66
New Zealand
-0.54
-1.32
-1.72
Indonesia
2.50
6.32
8.86
Malaysia
2.80
6.69
7.16
Philippines
2.70
5.93
5.48
Singapore
2.44
7.65
13.54
Thailand
1.43
4.18
7.55
China
-1.05
-1.64
-1.62
India
-0.25
-0.40
-0.46
Taiwan
1.23
2.54
3.48
Korea
1.89
3.42
3.67
Hong Kong
1.26
1.31
1.18
Europe
-0.24
-0.38
-0.47
Source: G-Cubed Asia Pacific Model version 58n
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
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
Table 7: Change in Current Account/GDP as a results of various shocks
(%point deviation from baseline)
US Fiscal policy
USA
Japan
Canada
Australia
New Zealand
Indonesia
Malaysia
Philippines
Singapore
Thailand
China
India
Taiwan
Korea
Hong Kong
Europe
-1.58
0.95
1.04
1.00
1.57
0.56
1.03
2.54
-0.40
1.31
0.24
0.52
0.43
1.10
5.14
0.67
-1.89
0.94
1.36
1.11
2.57
1.24
2.10
2.94
0.34
2.09
0.48
0.82
0.73
1.59
4.53
0.61
Source: G-Cubed Asia Pacific Model version 58n
-1.95
1.00
1.41
1.21
2.67
1.22
1.75
2.20
1.51
2.32
0.38
0.71
0.89
1.33
3.57
0.66
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.
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
Table 7: Change in Current Account/GDP as a results of various shocks
(%point deviation from baseline)
year 1
East Asia Appreciation
USA
Japan
Canada
Australia
New Zealand
Indonesia
Malaysia
Philippines
Singapore
Thailand
China
India
Taiwan
Korea
Hong Kong
Europe
0.00
-0.01
-0.01
-0.01
-0.02
0.04
0.11
0.07
-0.03
0.01
0.02
0.00
-0.01
0.09
0.06
0.00
year 5
0.00
0.00
0.00
0.00
-0.01
0.00
0.03
0.01
-0.03
0.03
-0.01
0.00
0.00
0.00
0.02
0.00
Source: G-Cubed Asia Pacific Model version 58n
year 10
0.00
0.00
0.00
0.00
0.00
-0.01
-0.01
-0.01
-0.01
0.02
0.00
0.00
0.00
-0.02
-0.01
0.00
Change in Real GDP as a result of 10% Asian Appreciation
(% deviation from baseline)
USA
Japan
Canada
Australia
New Zealand
Indonesia
Malaysia
Philippines
Singapore
Thailand
China
India
Taiwan
Korea
Hong Kong
Europe
year 1
year 5
year 10
-0.01
0.01
0.00
-0.02
0.03
0.01
-0.01
0.01
0.00
-0.03
0.02
0.01
-0.01
0.01
0.01
-2.50
-0.25
-0.06
-0.87
-0.42
-0.22
-2.27
-0.30
-0.04
-0.09
0.01
0.03
-0.67
-0.25
-0.23
-4.13
-0.19
-0.05
-0.01
0.01
0.00
-0.06
0.01
0.00
-2.23
-0.55
-0.16
-2.08
-0.47
-0.18
-0.01
0.01
0.01
Source: G-Cubed Asia Pacific Model version 58n
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
Table 7: Change in Current Account/GDP as a results of various shocks
(%point deviation from baseline)
Asian Fiscal Stimulus
USA
Japan
Canada
Australia
New Zealand
Indonesia
Malaysia
Philippines
Singapore
Thailand
China
India
Taiwan
Korea
Hong Kong
Europe
0.05
0.11
0.07
0.10
0.32
-0.77
-0.17
-0.31
-0.35
-1.11
-0.47
0.08
-0.93
-0.74
-0.69
0.06
0.04
0.10
0.06
0.10
0.32
-0.69
-0.02
-0.15
0.04
-1.08
-0.41
0.06
-0.89
-0.66
-0.57
0.06
Source: G-Cubed Asia Pacific Model version 58n
0.04
0.10
0.06
0.09
0.29
-0.67
-0.02
-0.18
0.24
-0.99
-0.38
0.05
-0.87
-0.65
-0.54
0.06
Table 11. Actual V.S. Simulated Changes in Current Account Balances
Actual Balances
Simulated Changes over 5 Years with the Shock of
Asian Investment
US Fiscal
Sum
Declines (A)
Expansion (B)
(A+B)
Country
1997
2002
Change
1997-2002
USA
-1.5
-4.6
-3.1
-0.3
-1.9
-2.2
Japan
2.2
2.8
0.6
1.2
0.9
2.1
Korea
Hong Kong
Singapore
Taiwan
-1.6
-4.4
15.6
2.4
1.0
8.5
21.4
9.1
2.6
12.9
5.8
6.7
3.4
1.3
7.7
2.5
1.6
4.5
0.3
0.7
5.0
5.8
8.0
3.3
China
Indonesia
Malaysia
Philippines
Thailand
4.1
-2.2
-5.9
-5.3
-2.0
2.8
3.9
11.1
2.1
5.6
-1.3
6.1
17.0
7.4
7.6
-1.6
6.3
6.7
5.9
4.2
0.5
1.2
2.1
2.9
2.1
-1.2
7.6
8.8
8.9
6.3
Source: G-Cubed Asia Pacific Model version 58n
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
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.
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)
Table 1
Scenario
Change from baseline in United States key variables under
different scenarios
Current account
(per cent of GDP
change from
baseline)
Trade balance
(per cent of GDP
change from
baseline)
Real effect
exchange rate
(percentage point
Real GDP
change from (per cent deviation
baseline)
from baseline)
2005 2007 2009 2005 2007 2009 2005 2007 2009 2005 2007 2009
Fall in US
0.3 0.3 0.3
0.3 0.3 0.2 -2.4 -2.4 -2.4
consumption
Fall in US fiscal
deficit
0.9 1.3 1.3
0.9 1.3 1.3 -7.1 -9.6 -11.3
Investor confidence
in Asia restored
0.2 0.2 0.3
0.2 0.2 0.2 -1.2 -1.3 -1.2
Productivity boost
0.1 0.1 0.1
0.1 0.1 0.1 -0.3 -0.4 -0.4
in China
Productivity boost
in Europe
0.2 0.2 0.3
0.2 0.2 0.2 -1.6 -1.2 -0.9
Source: G-Cubed (Asia Pacific) model. Documentation at www.msgpl.com.au.
-0.3
-0.2
-0.1
-0.6
-1.9
-1.2
-0.1
-0.2
-0.3
-0.0
-0.1
-0.1
-0.2
-0.3
-0.3
Is there a demographic story behind the
imbalances?
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
Figure 1: Population Growth Rate 1950-2050
3.5
3.0
USA
2.5
2.0
Europe
1.5
ROECD
Asia
1.0
Latin America
0.5
India
China
0.0
FSU
-0.5
DCs
-1.0
19
50
19 -55
55
19 -60
60
19 -65
65
19 -70
70
19 -75
75
19 -80
80
19 -85
85
19 -90
90
19 -95
95
20 -00
00
20 -05
05
20 -10
10
20 -15
15
20 -20
20
20 -25
25
20 -30
30
20 -35
35
20 -40
40
20 -45
45
-5
0
percentage per year
Japan
Source: UN, World Population Prospects: The 2004 Revision (Medium Variant)
Figure 2: Elderly Dependency Ratio 1950-2050
(ratio of adults 65+ to adults 15-65)
0.8
0.7
USA
0.6
Japan
Europe
0.5
0.4
Asia
Latin America
0.3
India
China
0.2
FSU
DCs
0.1
Source: UN, World Population Prospects: The 2004 Revision (Medium Variant)
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
0.0
1950
ratio
ROECD
Figure 3: Child Dependency Ratio 1950-2050
(ratio of children 0-14 to adults 15-65)
1.0
0.9
0.8
0.7
Japan
0.6
Europe
ROECD
0.5
Asia
0.4
Latin America
India
0.3
China
FSU
0.2
DCs
0.1
Source: UN, World Population Prospects: The 2004 Revision (Medium Variant)
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
0.0
1950
ratio
USA
Figure 12: Contribution to Current Accounts of Own versus Global Demographic Change
US Current Account/ GDP
Japan Current Account/GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
5
% point change
1
0.5
0
-0.5
3
2
1
global
20
05
20
09
20
13
20
17
20
21
20
25
20
29
20
33
20
37
20
41
20
45
20
49
0
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
-1
4
ow n
global
China Current Account/ GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
% point change
1.5
1
0.5
0
-0.5
global
ow n
global
ow n
2049
2045
2041
2037
2033
2029
2025
2021
2017
2013
2005
2049
2045
2041
2037
2033
2029
2025
2021
2017
2013
2009
-1
2005
% point change
ow n
Latin Am erica Current Account/GDP
( r e l a t i v e t o n o d e mo g r a p h i c t r a n s i t i o n )
2009
% point change
1.5
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
Background Papers
www.sensiblepolicy.com
www.gcubed.com