Download A Neokeynesian Balance of Payment Model. Study Case on

A Neokeynesian Balance of Payment Model.
Study Case on Romanian Economy
Authors:
PhD. Professor Mihai Roman
PhD. Professor Dumitru Marin
Academy of Economic Studies,
Bucharest, Romania
Abstract
Net external debt is now an important problem of world economies.
Last periods experience shows that many countries can’t face debt
pressure and stops to pay there debts. Authors propose in this paper a
dynamic IS-LM-BP Neokeynesian model to analyze external debt
sustainability. To verify model hypothesis we use Romania’s
economy data during 1990-2003. Model shows that exist budgetary,
fiscal and monetary politics to control and influence external debt
level.
Key words: external debt, real exchange rate, foreign investment, ISLM-BP model
1. Introduction
Romanian’s adhesion to E.U. radically affects political, economical and social life.
Economically we have advantages and also disadvantages for consumers and producers.
The mains advantages are:
 An increasing concurrence between companies;
 Decrease of good prices;
 Financial aids for economical and social restructuring;
 Easier access to European funds for R&D, restructuring economy and social life, etc.
Also, we have disadvantages:
 an increasing breakdown process of Romanian’s small companies;
 unemployment increase;
 a rise of prices for energy, fuel and methane gas;
 lack of independence for national financial and monetary policy;
 maximum level of budgetary deficit will be 3%, etc.
All this elements will affect also net external debt. The commercial balance continue to be
in an increasing deficit so long as Romanian’s companies not apply EU’s rules and not try to
increase productivity and efficiency. As consequences the export level will increase and import
level will decrease. The capital balance will be in disequilibrium. Other European countries
experience shows that an increasing inflows of foreign direct investments and restructuring
funds. These elements generate an appreciation of national exchange rates as part of BalassaSamuelson effect.
Adopting European currency by new states generates three point of vue:



first of them – euro skeptical one – said that we don’t need a such process
because of reduced economical performances of new admmited countries, and if
this transition will be adopted, then Euro will be a weaker currency;
the second one represent the euro-optimistically researchers that said the cost of
adopting euro currency by new countries will be small or neglected;
third, the euro-pragmatically point of vue said that every country must adopt euro
currency only when economical performances are the good one.
Analyzing effects of Euro adopting by forerunner states (Greece, Spain or Portugal) we
see they did not have problems to join the Economic and Monetary Union. On the other side, the
ten new states that joined EU in 2004 seems to have economical difficulties to adopt euro
currency because of national currency appreciation, a weaker productivity increase face to other
European countries and for particular conditions of every country.
In our paper we propose a dynamic IS-LM-BP model to analyze the sustainable growth
debt and exchange rate.
The mains variables of our model are net external debt, direct foreign investments,
domestic and external demand and real exchange rate. Based on these basic variables we try to
appreciate the Romanian’s sustainable net external debt and balance of payments instead of
Romania’s adhesion to EU in 2007.
2. Literature
Some authors like Halpern and Wyplosz1 (2001) analyzing euro adoption shows that real
appreciation of national currencies are a consequences of excessive depreciation at the
beginning of transition processes at market economy. But recent papers show that real
appreciation exchange rate for transition countries are not explained totally by BalassaSamuelson effect2.
Other authors verifying empirically and econometrical Balassa –Samuelson effect are
Bahmani, Oskooe and Rhee (1996)3, Lafrance and Schembri (2000)4, Drine and Rault (2002)5 or
Porter (1998)6.
Halpern,L., Wyplosy, C – Economic transformation and real exchange rate in the 2000’s : The Balassa-Samuelson
Connection – United Nation Economic Commission for Europe, (UN/ECE), Geneve, sept. 2001
2
Balassa-Samuelson effect analyze exchange rates variations dues on relative productivities differences between
exported goods on international markets.
3
Bahmani,Oskooe and Rhee (1996)– Time series Support for Balassa’s Productivity / bias Hypothesis: Evidence
for Korea, Review Economics , 4
1
To explain Balassa-Samuelson effect, Paul Krugman7 shows that:






different countries workers have different productivities;
some sectors are more dynamic like others in R&D processes;
sectors with relative unchanged productivities do not export goods;
real exchange rates are flexible so that exported good prices are the same like in
PPP- theories;
exchanges rates modifies depending on exportable goods productivities, but
average productivity do not vary in the same proportion;
Productivity rise is transformed in supplementary revenue, and as consequences
real revenue vary in a small proportion like nominal revenue.
Other recent papers shows that exchange rate appreciation is not total explained by
Balassa-Samuelson effect, especially for transition countries: De Broek and Slok (2001), Egert
(2002) Mikaljed (2002) Flek and all (2003). But exchange rate appreciation cannot be explained
by traditional theory of external accumulation (see Lane and Milesi-Ferretti (2000, 2002)).
Under such hypothesis countries with a large external debt must have a surpluss of trade balance
and by consequences a competitive exchange rate and a depreciation tendency, but this
hypothesis is not verified for transition countries.
3. The Model8
We consider a small, open economy where we have the next variables, small letters represent
variables in logarithmic expression:
m – real money supply;
p – price level;
y – GDP level;
R – nominal interest rate (percent);
R* - world nominal interest rate (percent);
g – government expenses;
k – capital stock;
c – real consumption level;
i – domestic investments;
f – foreign direct investments;
4
Lafrance & Schembri (2000)- http://www. bank-banque-canada.ca/publications/review
Drine , I, Rault, C.(2002) – Panel data analysis of the Balassa-Samuelson effect hypothesis, Sorbonne University
6
Porter, M.E. (1998)- The Competitive Advantage of Nations, Free Press Publ.
7
Krugman, Paul R. 1996. "Does Third World Growth Hurt First World Prosperity?" Harvard Business Review 72,
pp. 113-121
8
This model is an original extension of neokeynesian models dues on Borensztein (1998), Lim (2001) Holland şi
Pain (1998)- models describyng capitals effectes on net exports and Blanchard (1981), Bulir A. şi Smidkova K.
(2005) (Working paper, FMI, WP/05/27) – who analyze external investition effects on domestic capital and
exchange rates.
5
y* - external demand;
k - capital dynamics;
t – time variable;
d – country debt;
d - initial country external debt;
nx – net commercial balance;
e – exchange rate (lei/Euro);
ai, i =1,17 model coefficients, that are positive, real numbers, all smaller than one.
For our economy, IS-LM equations are:
(1)
(2)
m  p  a1  y  a2  R
y  a3  k  a4  c  a5  g  a6  y * a7  f  a8  e  nx
(LM)
(IS)
Real economy is described by IS equation Y  C  I  G  NX , where Y – is output,
(GDP), C – consumption level, I – investments, G – public expenditures , Nx – net commercial
balance (Export minus Import).
We suppose also that in real sector output depend non linear on consumption,
investments, government expenditure and net commercial balance: Y  C a  G b  I c  Nx d , or
equivalent in logarithmic form: ln Y  a ln C  b ln G  c ln I  d ln Nx .
Also, we have hypothesis:
H1. The output from current period depends on total capital variation, k .
H2. Production function is a neoclassical one: (3) y    k .
H3. Total capital K has two components: domestic investments, I ,and foreign investments F, so
that K = I + F, or in logarithmic expression: (4) k = i + f.
H4. Efficiency of domestic capital is equivalent with the efficiency of foreign capital.
H5. There exist a direct, positive relationship between production level and investment level.
H6. Consumption and government expenses have a direct, positive influence on production level.
H7. External demand for domestic goods is estimated by world growth rate.
H8. Net commercial balance has a direct influence on production and depends on exchange rate,
world demand and the sensitivity coefficient a8.
Capital dynamic equations describe two types of countries: in the first one, there exists a
capital surplus, so we have tendencies to export capital and the second one that we have a capital
deficit so there are capital inflows.
Capital dynamics depends on: real interest rate (negative dependency), capital
depreciation (negative dependency), debt level d (negative dependency) and time t (positive
dependency, time historically verified).
We have the capital dynamic equations (5):
(5)

k  k *  k  a9  t  a10  r  a11  k  a12  d



k  k *  k  a13  t  a10  r  a11  k  a12  d
For the UE -15 states we have a capital surplus, so that k  k * , and for candidate states
we have a capital deficit, so that k  k * , where k * is the equilibrium level of capital for
domestic economy.
External debt (private and public) d, depend on: initial level of debt, d , output variation
(export rise conduct to debt diminish), government expenses, g, net capital inflows and net
commercial balance.
(6)
d  d  a14  y  a15  f  a16  g  a17  e  nx
Remark: All variables in our model (except interest rates) are in logarithmic expression.
For the negative variable (like capital flows or net commercial deficit) we consider the positive
expression and the influence are described by negative coefficients.
(7)
Interest rate dynamic equation (or for real exchange rate) is:
R  R  R * , or e  r  r * 9
In our model p*,R*,g, y*, f, d , t are exogenous variables, and : y, m,R, e, p, d are
endogenous variables.
3. Solutions
From equation 1 we have:
1
a1  y  m  p   R*  1 a1    k  m  p   R *
R  R  R* 
(8)
a2
a2
Capital dynamic equation is:
1
k 
   k  a4  c  a5  g  a6  y * a7  f  a8  e  nx 
(9)
a3
Replacing in eq. 5 we obtain:
1
r
 k  a9  t  a11  k  a12  d 
a10





1
 k  a9  t  a11  k  a12  d  a14  y  a15  f  a16  g  a17  e  nx 
a10

1
 k  a9  t  a11  k  a12  a14    k  a12  d  a12  a15  f  a12  a16  g  a12  a17  e  nx
a10

So, exchange rate dynamic equation became:
e  E  p *  p . If we consider E  R we have:
e  R  R *  p *  p  R  p   R *  p * , so e  r  r * .
9
Real exchange rate is: e  E  p *  p , so we have:

(5.10)
a4
a
a
a
a


 c  5  g  6  y *  7  f  8  e  nx  a9  t 

1  k 
a3
a3
a3
a3
a3
e  
  a3

a10 

  a11  a12  a14     k  a12  a15  f  a12  a16  g  a12  a17  e  nx  a12  d 
 a  a 
 a8
a a
a 

e   12 14

 11   k  nx  
 12 17
a10
a3  a10 a10 
a10

 a3  a10

 a5
a4
a a
 c  
 12 16
a3  a10
a10
 a3  a10

 a7
a a 
  e  
 12 15   f 
a10 

 a3  a10

a6
a
a
  g  12  d 
 y*  9  t  R*
a10
a3  a10
a10

Matrix form of dynamic equations is:
(11)

 a8
a a 
nx  
 12 17 

e  
a10 
 a3  a10
   
 a8  nx 
k 
 


a3 


 a 7
a a 
 12 15 

a a
a10 
  3 10

 a7 
  


 a3 
 a4 


 a3  a10 
 a4 
  
 a3 
 a12  a14  
a 



 11 
a10
a3  a10 a10  e 



 k 
 
 


 a3 
 a5
a a 

 12 16 
a10 
 a3  a10
 a5 
  
 a3 
 a12 
 

 a10 
0
 a6 


 a3  a10 
 a6 
  
 a3 
 a9 
 

 a10 
0
 f 
 c 
  
 1  g 
 d 
  
0   y *
  
 t 
 R *
 
or x  A  x  B  u
e 
where: x    - is the matrix of state derivative variables;

k 
e 
x    - the state- variables matrix;
k 
 f 
 c 
 
g 
 
u   d  - exogenous variable matrix;
 y *
 
 t 
 R *
 

 a8
a a
 12 17
nx  
a10
 a 3  a10
A

 a8  nx 
 


a 3 





 a12  a14  
a 



 11 
a10
a 3  a10 a10 

- coefficients matrix;

 
 

 a3 

 a 7
a a 
 12 15 

a a
a10 
B   3 10

 a7 
  

 a3 

-
 a4 


 a3  a10 
 a4 
  
 a3 
 a5
a a 

 12 16 
a10 
 a3  a10
 a5 
  
 a3 
 a12 
 

 a10 
0
 a6 


 a3  a10 
 a6 
  
 a3 
 a9 
 

 a10 
0

 1


0 

Exogenous variable coefficient matrix
e  0
From system phase diagram, at stationary linear lines, 
, we find the equilibrium lines
0
k

coefficients:
a
dk
(12)
 8  nx
k 0
de

dk
de
(13)
e 0

a8  a3  a12  a17
 nx
  1  a3  a12  a14   a3  a11
Case I.
If we have a positive commercial balance, (nx > 0) then the equilibrium lines coefficients
a8  a3  a12  a17
a
are positives, and for (14) 8 
, the system state diagram is draw
   1  a3  a12  a14   a3  a11
in Figure 1.
e
e  0
I
IV
E
II
k  0
III
k
Figure 1.
The points from II and IV zones are characterized by a stable evolution versus
equilibrium point E, and the points from I and III zones are in a disequilibrium situation.
Case II.
If we have a negative commercial balance, then the equilibrium lines coefficients are negatives.
Next we analyze the system for different sizes of lines coefficients.
II.a) In figure 2 is drawn the situation that coefficient of capital equilibrium line is greater like
exchange rate equilibrium line coefficient.
(15)
a8

nx 
a8  a3  a12  a17
nx
  1  a3  a12  a14   a3  a11
e
I
e  0
k  0
IV
E
II
III
k
Figure 2
In this case the points from II and IV zones are in a stable situation and the points from I
and III zones are unstable.
II.b) Figure 3 shows the situation that the coefficient of capital equilibrium line is smaller like
exchange rate equilibrium line coefficient.
a8  a3  a12  a17
a8
(16)
nx 
 nx
  1  a3  a12  a14   a3  a11

e
e  0
I
k  0
IV
E
II
III
k
Figure 3
In this case we have a stable situation for every point of our map.
Tr  A  0
Our system is a stable system if: 
, respectively if the proper values of A
 Det  A  0
matrix are negatives. From these conditions results the stability and instability zones of our
model.
The influence on external debt and on balance of payment deficit results from
substitution in eq. 6 of previous results.
Next we analyze the influence of exogenous variables on commercial balance deficit.
In equation 6 exogenous variables coefficients are also the elasticities of external debt
depending on output (a14), external demand (a15), government consumption (a16) and commercial
balance (a17).
(6)
d  d  a14  y  a15  f  a16  g  a17  e  nx
Differentiating equation 6 we find the multipliers of exogenous factors:
(7)
 d  a14   y  a15   f  a16   g  a17  e   nx  a17  nx   e
The total effect of exchange rate and external trade volume is:
(8)
 d  a17  e   nx  nx   e
We analyze some shocks effects on capital stock, exchange rate and debt level.
An unexpected shock of direct foreign investments modify also capital stock and external
debt shifting the equilibrium point to the right (see Figure 4) so we have an appreciation of
national currency, a rise of capital stock and also external debt level.
e
I
e  0
k  0
IV
E
II
III
k
Figure 4
Currency appreciation is instantaneous, capital stock rise in real time, but external debt
variation is delayed. The effect on net export is ambiguous at the first time and depends on
exchange rate variation level and capital stock variation level. Also the output level can decrease
depending on external efficiency decreasing and on small rise of capital stock. But in the future
capital stock continue to rise and this will affect the competitivity diminish due on currency
appreciation.
This aspect seems to respect the economic growth model of Central and East European
transition countries10.
An external demand shock also generate a currency appreciation and a capital stock
diminish (see Figure 5) and a shock on external debt will appreciate domestic currency and
generate a smaller capital flows to outside.
e
I e'  0
e  0
k'  0
IV
E
E’
k  0
II
III
Figure 5.
k
Shocks effects on external debt
To analyze shock influences on debt we use equations 6 and 11.
a) direct foreign investment shocks (f)
A variation of direct foreign investment affects also capital and exchange rate.
The multiplier or direct foreign investments on exchange

a
7
 e /  f  

a

 3 a10
 a 
a12  a15 
 and on capital is:  k /  f    7  .
a10 
 a3 
From this we have:
(9)
10

 a7 
 a7
a  a 
  a15  a17  nx  
 12 15   f
a10 
 a3 
 a3  a10
 d   a14     

Vezi Bulir A. şi Smidkova K. (2005) -Working paper, FMI, WP/05/27
rate
is:
We observe that effects of direct foreign investments on external debt are ambiguous and
depend on size of different term on equation 19.
b) consumption shocks
A consumption shock will affect the external debt with the multiplier (20):


  c


If the commercial balance is negative then a rise of consumption generate a rise of
external debt, and if the commercial balance is positive, then the effect of consumption rise on
external debt is ambiguous.
 a4 
 a4
  a17  nx  
 a3 
 a3  a10
 d   a14     
(10)
c) budgetary shocks
A budgetary shock  g affects the external debt by the multiplier:


  g


So the effect of budgetary shock on external debt in ambiguous because of many influences
appears inside multiplier.
 a5 
 a5
a a
  a16  a17  nx  
 12 16
a10
 a3 
 a3  a10
 d   a14     
(11)
d) External demand shocks
An external demand shock will affect also capital stock and exchange rate:

 a 
a6 
 and  k /  y*    6  .
 a3  a10 
 a3 
 e /  y*  
From these we have:
(12)

 a6
 a3
 d   a14     


 a6
  a17  nx  

 a3  a10

  y *

The total effect on external debt is ambiguous because we have a positive effect due on
exchange rate and a negative effect due on capital and production rise.
4. Empirical model
Data used in our model are from National Institute of Statistics, National Bank, IMF and
World Bank during 1990-2003. We estimate model coefficients in E-VIEWS econometrical
software.
A. LM curve
Figure 6 shows the real money supply and real GDP dynamics in Romania in 1990-2003
periods. From this figure we can observe that both indicators have the same shape.
Correlation coefficient between m and y is 0.552 that shows a direct, strong link between money
supply and GDP dynamics.
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
19
19
91
1000,00
800,00
600,00
400,00
200,00
0,00
90
bilions lei 1990
Money supply and GDP in Romania during 19902003 period
years
real money supply
Real GDP(bil. Lei 1990 prices)
Data sources: National Institute of Statistics, Romania, authors calculus
Figure 6.
Analyzing dependency between real money supply and interest rate we can observe (see
Figure 7) a negative relationship between these variables.
The correlation coefficient between real money supply and interest rate is -0.899
consistent with model hypothesis.
years
real money supply(bil.lei 1990)
03
20
02
20
01
20
00
20
99
19
97
98
19
19
96
19
95
19
94
19
93
19
92
19
19
19
91
600,00
500,00
400,00
300,00
200,00
100,00
0,00
90
billions lei, percents
Real money supply and interest rates in
Romania during 1990-2003
interest rate (%)
Data sources: National Institute of Statistics, Romania, authors calculus
Figure 7
Estimating coefficients of LM curve we obtain equation 1’:
(1’)
m  p  0,984  y  0,323  R
(LM)
In this equation the theoretical hypothesis are verified because we have positive
sensitivity of money supply on output (a1 = 0,984 > 0) and negative sensitivity of money supply
on interest rate (a2 = 0,323 > 0).
B. IS curve
Romania’s economy evolution was an oscillatory one during 1990-2003. There were two
business cycles (two recession periods between 1990-1992 and 1997-1999, and two growth
periods between 1993-1996 and 2000-2004). Figure 8 shows this evolution.
03
20
02
20
01
20
00
20
99
19
98
19
97
19
95
96
19
19
93
94
19
92
19
19
19
19
91
1000
900
800
700
600
500
400
300
200
100
0
90
billions lei 1990 prices
GDP, final consumption and government
consumption in Romania during 1990-203
years
GDP
Final Consumption
Government consumption
Data sources: National Institute of Statistics, Romania, authors calculus
Figure 8.
Correlation coefficients between GDP and final consumption is 0.817 that indicate a
direct, positive and strong relationship between GDP and consumption evolution, and a positive,
but week relationship between GDP and government consumption (0.09). This can indicate that
budgetary policy in Romania was an inefficient one with small effects on Romania’s economic
growth.
We have also a positive relationship between GDP and export levels (see Figure 9),
correlation coefficient between GDP and exports (estimated by external demand) is 0.303 who
respect theoretical model hypothesis. We can observe a short gap between GDP and export level,
the export level start to increase one year before GDP increasing period, as a sign of economic
restarting growth.
03
02
20
01
20
00
20
99
20
98
19
97
19
96
19
95
19
94
19
93
19
19
92
19
19
19
91
1000,00
800,00
600,00
400,00
200,00
0,00
90
billions lei 1990
GDP and external demand evolution in Romania
during 1990-2003
years
Real GDP
Real external demand
Data sources: National Institute of Statistics, Romania, authors calculus
Figure 9.
In figure 10 we can see the evolution of direct foreign investment during 1990-2003. This
evolution is similar to GDP evolution, but is delayed with one year inverse like export influence,
respectively the minimum point of this are one year after minimum point of GDP evolution. Also
correlation coefficient between GDP and foreign investments is a positive one, 0.465.
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
19
19
91
200,00
180,00
160,00
140,00
120,00
100,00
80,00
60,00
40,00
20,00
0,00
90
billions lei 1990
Real foreign investitions in Romania 1990-2003
years
real foreign direct investitions (bil. lei 1990)
Data sources: National Institute of Statistics, Romania, authors calculus
Figure 10.
Commercial balance has an oscillatory evolution during 1990-2003 years, but in every
year was a negative level. Election cycles generate greater deficits, like in 1996 and 2000, but the
tendency is to increase the deficit level. Correlation coefficient between output and commercial
balance deficit is -.54 that indicates a strong negative relationship between these variables.
The relationship between output and capital dynamics was a positive one, but capital
growth was much greater like output growth (see Figure 11).Correlation coefficient between
output and capital growth was 0.37 that confirm theoretical hypothesis of positivness of a3
coefficient.
12
10
8
6
4
2
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
19
19
91
0
90
billion lei log. expression ,1990
prices
GDP and capital growth in Romania during 1990-2003
years
GDP
capital growth
Data sources: National Institute of Statistics, Romania, authors calculus
Figure 11.
Estimating IS- coefficients equation we obtain:
(2’)
y  0 ,005  k  0 ,973  c  0 ,1086  g  0 ,0843  y * 0 ,119  f  0 ,0015  e  nx
(IS)
Both correlation coefficients and estimators of IS-equation confirm theoretical hypothesis
of our model.
From our model we observe that the bigger contribution to GDP dynamics was due on
consumption level, then the direct foreign investment, external demand and government
consumption. Commercial balance has a negative influence on GDP growth because of
commercial balance deficit.
C. Capital dynamics
Analyzing capital dynamics we observe a permanent growth of this during 1990-2003.
Correlation coefficient between capital level and time was .909 that strongly confirm model
hypothesis for transition countries. Correlation coefficient between capital dynamics and interest
rate was a negative one, -.334 (classical hypothesis of IS-LM model).
Dynamic equation of our model is:
(5‘)

k  2 ,003  t  0 ,445  r  0 ,686  k  0 ,136  d
Capital dynamics depend positively only on time in out equation, and inversely on
interest rate, capital level and external debt.
D. External debt equation
Estimating external debt equation coefficients we obtain positive relationships with direct
foreign investments and government consumption and negative relationships with GDP level and
net export.
(6’)
d  0.244  y  0 ,057  f  0 ,337  g  1,031  e  nx
The magnitude of coefficients shows that the bigger contribution to external debt is due
on commercial balance deficit and government consumption, and foreign investment contribute
in a small measure to external debt growth.
E. Production function
Estimating neoclassical production function (3) coefficient we obtains for y    k :  is
equal to 0,737.
Synthesis of model coefficients:
a1 = 0,984; a2 = 0,323; a3 = 0,005; a4 = 0,973; a5 = 0,1086; a6 = 0,0843;
a7 = 0,119; a8 = 0,0015; a9 = 2,003; a10 = 0,445; a11 = 0,686; a12 = 0,136;
a14 = 0,228; a15 = 0,602; a16 = 0,286; a17 = 0,374;  = 0,737.
5. Model analysis
Starting on model equations and coefficients estimations we determine system diagram
for Romania’s economy.
State variable coefficients A is:

 a8
a a
 12 17
nx  
a10
 a 3  a10
A

 a8  nx 
 


a 3 





 a12  a14  
a 



 11 
a10
a 3  a10 a10   4 ,13

=
  1,253
 
 

 a3 

and command variable matrix coefficients B is:
332 ,72
147 ,4 
 a 7
a a 
 12 15 

a a
a10 
B   3 10

 a7 
  

 a3 

 53,46 437 ,30

 23,8  194 ,6
 a4 


 a3  a10 
 a4 
  
 a3 
 a5
a a 

 12 16 
a10 
 a3  a10
 a5 
  
 a3 
48 ,70
0 ,305
37 ,88
4 ,501
 21,72
0
 16 ,86
0
 a12 
 

 a10 
0
 a6 


 a3  a10 
 a6 
  
 a3 
 a9 
 

 a10 
0

 1
=

0 

 1
0 
Equilibrium line coefficients were in 2003:
dk
de
k 0

a8
dk
de
e 0

a8  a3  a12  a17
 nx = -0.01242
  1  a3  a12  a14   a3  a11

 nx = - 0.0085
Graphical and analytical analysis shows that Romania’s economy was in 2003 in III zone of case
II (a commercial balance in deficit) (see Figure 12). Equilibrium capital coefficient line k  0 is
greater like equilibrium exchange rate coefficient line e  0 , (-0,0085 > -0,01242) so we can
obtain also a stable situation or an unstable situation.
But from Tr (A) = 143,37 > 0, and Det(A) = -192,14, we obtain a positive proper value
and a negative proper value of A matrix, and that means an unstable system.
In fact, for 2004 and 2005 years we expect a capital rise and an exchange rate
appreciation, like a partial confirmation of Balassa-Samuelson effect.
e
I
e  0
k  0
IV
E
II
III
k
Figure 12
 Foreign investment variation influence
In our theoretical model foreign investments has an unambiguous influence on external
debt (see equation 24), but for Romania we obtain:

 a 
 a7
a  a 
(24)  d   a14      7   a15  a17  nx  
 12 15   f = - 225,985 f
a10 

 a3 
 a3  a10
This value shows that we have a reduction of external debt for increasing external
investments especially due on production increase.
 Consumption variation influence
Consumption growth has always a positive influence on external debt growth, but we are
interested on size of influence. For Romania, this influence is very strong (see eq. 25) and that
indicate a final consumption rise is strongly oriented versus imported goods, not to domestic
goods.
(25)

 a4
 a3
 d   a14     


 a4
  a17  nx  

 a3  a10

  c = 1918,358  c

 Government consumption influence
Government consumption has also a strong positive influence on external debt (see eq.
26), even that in theoretical model we have an unambiguous effect. For Romania any budgetary
shock generates an important rise of external deficit, so that a reduction of government
consumption is a good instrument for debt reduction.
 External demand shock
An external demand shock, in a situation of negative net export, will increase external
debt of Romania.
(27)

 a6
 a3
 d   a14     


 a6
  a17  nx  

 a3  a10

  y * = 166,205  y*

But this influence is less important like others shocks discussed previously.
6. Conclusions
Romania’s economy has a complex evolution in last 15 years. There are extended
changes at every level of social, political and economical life: over 60% private propriety in
economy, 4 different political parties won different elections, but especially existence of two
completed business cycles in economy. External debt of Romania, but also for other countries,
became an important problem in economical dynamics. Is it possible to control and influence
them?
IMF papers indicate that the proporttion of externat debt in GDP is important, not
absolute size of external debt. More, the debt level is influenced by export proportion in GDP,
and sustainable debt depend on this this proportion. For the countries with over 40% export
proportion in GDP is possible to obtain a 65% level of sustainable debt in GDP, and for
countries with 30-40% export proportion in GDP it is a 53% proportion of sustainable debt in
GDP11.
Romania’s economy is in the second situation, but the actual proportion of external debt
in GDP is around 30%, so it is exists 20-25% possibility to extend actual debt level.
In our model we try to explain influence of different shocks on external debt and on
exchange rate and how different politics can influence this level.
The main conclusion of our analysis is that budgetary politics is not efficient to influence
external debt. Fiscal and monetary policies are more efficient for Romanian government instead
to control the debt level.
References
1. Bahmani,Oskooe and Rhee (1996)– Time series Support for Balassa’s Productivity / bias
Hypothesis: Evidence for Korea, Review Economics , 4
2. Balassa-Samuelson effect analyze exchange rates variations dues on relative productivities
differences between exported goods on international markets.
3. Bulir A. şi Smidkova K. (2005) Exchange rates in new EU accesion countries: What are we
learned from the forerunners, (Working paper, FMI, WP/05/27)
4. Drine , I, Rault, C.(2002) – Panel data analysis of the Balassa-Samuelson effect hypothesis,
Sorbonne University
5. Halpern,L., Wyplosy, C (2001) – Economic transformation and real exchange rate in the 2000’s :
The Balassa-Samuelson Connection – United Nation Economic Commission for Europe,
(UN/ECE), Geneve, sept. 2001
6. Krugman, Paul R. (1996) "Does Third World Growth Hurt First World Prosperity?" Harvard
Business Review 72, pp. 113-121
7. Lafrance & Schembri (2000)- http://www. bank-banque-canada.ca/publications/review
8. Porter, M.E. (1998)- The Competitive Advantage of Nations, Free Press Publ.
9. Tiganescu, E., Roman, M. (2005) Macroeconomie. O abordare cantitativa, Ed. Economica,
Bucharest
10. *** National Institute of Statistics Bookyear, 2004,2003, 2002.
Bulir A. şi Smidkova K. (2005) - Exchange rates in the New EU Accesion Countries : What Have We Learned
from the Rorerunners, (Working paper, FMI, WP/05/27), p. 16
11