- О проекте
- Результаты и Награды
- Партнерские программы
- Международные услуги
Батумский государственный университет им. Ш. Руставели, Грузия
Участник первенства: Национальное первенство по научной аналитике - "Грузия";
Based on the objectives of our study, its main objectives are: International macroeconomics (or international finance) as a subject cover many topical issues. What has happened (what will happen) to the dollar? Is the current account deficit too large? Should China devalue it’s yean?Should it first liberalize financial flows? Should Sweden give up its currency to join the euro? Should emerging market economies liberalize their financial markets? Is this good for world economic growth, or a source of instability? How, if at all, should we reform the IMF? What about globalization? These are interesting questions. To answer them we need to learn some international finance. About what is this field?
Key Words: international trade, international macroeconomics, international finance.
Исходя из целей нашей статьи, его главными задачами являются: Международная макроэкономика (или международные финансы) как субъект охватывают многие актуальные вопросы. То, что произошло (что будет происходить) с долларом? Является ли дефицит счета, текущих операций, слишком велик? Если Китай девальвировать Йену? Должна ли она первой либерализации финансовых потоков? Если Швецию отказаться от своей валюты, чтобы присоединиться к евро? Если страны с формирующимся рынком либерализации своих финансовых рынков? Является ли это хорошо для мирового экономического роста, или источник нестабильности? Как, если на всех, мы должны реформировать МВФ? А как насчет глобализации? Это интересные вопросы. Чтобы ответить на них мы должны узнать некоторые международные финансы. О том, что эта за область?
Ключевые слова:международная торговля, международные макроэкономика, международные финансы.
As is generally known, that as with international trade, international macro is the result of the fact that economic activity is affected by the existence of nations. If there were no national economies then we would not have this field. If there was no international trade we would not need international macro either. But countries do trade with each other, and because countries (not all, but many) use their own currencies we have to wonder about how these goods are paid for and what determines the prices that currencies trade at. More subtly, however, we have to also consider the fact that countries borrow and lend from each other: in other words, they trade inter-temporally — consumption today for consumption in the future. Because of international borrowing and lending economic opportunities are expanded and households have better options to smooth their incomes. These are good things. But just as the existence of banks make bank panics possible; the existence of an international financial system makes international financial crises possible. This is where all the interesting action of the course comes from. In order to understand such crises we need to understand the nature of the international financial system.
Chapter I – Some Important Facts about the International Economy
It is useful to begin with some general facts about the international economy. First some magnitudes.2 Foreign Exchange is the biggest market in the world, $1.5 trillion per day. US GDP is about $13.14 trillion as of 2006:2. Exports and imports are much smaller, about $1.437 and $2.220.6 trillion annually.3 Net exports are thus about -$783.1 billion. Compared to that federal government expenditures are about $921.8 billion,4 of which $617 billion is defense spending, while gross private investment is about $2.237 trillion, gross private savings is $1.795 trillion (gross government savings is $107 billion), so gross savings as a pct of GDP is 13.8%. Of course, most of that is replacement of capital, so net savings ($247 billion) as a percent of GDP is about 1.9%.
International trade is important; even more so with globalization: Not just the shares of exports and imports, but the shares of import-competing goods. In recent years the US has moved from being the largest international creditor to the largest international debtor. Does that have consequences? US now absorb almost 70% of global current account surpluses (see figure 1).
Figure 1: US Current Account as Share of Global Surpluses
The current account deficit of the US is now about 6% of GDP. This is quite large by historic standards, especially for the world’s reserve currency country. You can see that this is a recent trend, though quite strong. We were acquiring net foreign assets. Since then foreigners have been accumulating our IOU’s. Most observers believe that for the US to eliminate its current account imbalance the dollar will have to adjust significantly. Why? How much will it have to adjust? What about interest rates? What effect will this have on the global economy? Clearly to understand this we have to have some theory of the current account, how it is determined and what affects it. Notice the irony: The rest of the world is supplying the largest economy with low-cost financing. It is hard to know what the excess reserves of the rest of the world are, but suppose that they are twice the level of their short-term debt (one year). We can see how large these excess reserves have grown recently: see figure 3.
Figure 3: Excess Reserves Beyond 2X Short Term Debt Due Within 1 Year, Developing Countries.
Then it amounts to some $1.5 trillion and earns perhaps a zero real return (if those currencies are expected to appreciate). Given that those countries could perhaps earn 6% easily if they invested this wealth, this is a large transfer to the US.6 Note that 6% of $1.5 trillion is close to $100 billion. As a Turkish Economist Dani Rodrik has pointed out, this is “comparable to the gains thought to be achievable from the next round of trade liberalization, to global foreign aid, or to spending on key social sectors in a number of countries” (Rodrik, 2007:179).
Chapter II – Some Questions of International Finance
International finance is a consequence of multiple currencies, multiple fiat currencies; less of an issue with competing commodity currencies; It is also a consequence of inter-temporal trade.
This could be the subject of trade theory, but we study it because this trade often is manifested in securities. It is a subject of finance. These flows are very large, much larger than trade on a gross basis. Figure 4 shows that gross capital flows are about 6 to 7 times net flows. And it is primarily gross flows that unsettle markets.
It is the interaction of the two that is really important — the fact that many countries borrow in currencies that differ from their domestic ones. This is what sets the stage for currency and financial crises. Globalization is not new. As we shall see, the last part of the 19th century was the peak of globally integrated capital markets.
A stylized view of the history of capital flows is seen in figure 5:
Figure 5: A Schematic History of Capital Flows
This is a stylized view, but it is based on what we observed in global current accounts. Notice that capital flows were very large until 1913. Then there is a big trough that does not really recover till the mid-1980, though the post-1945 period is better than the 1930’s. Obviously, WW1 ended the golden years of world capital mobility. The Depression years though WWII were very bad. The big recovery starts with the oil shocks. Only recently are we back to the levels of pre-WW1. This tells us that it is not only technology that fuels globalization and capital flows, but also institutions. It is useful to look at some recent US data to get a feel for what international finance is about. We can look at bilateral exchange rates, which is simply the price of one currency in terms of another. In figure 6 I have plotted the price of one dollar in terms of the yen over the period since 1970 (Pilbeam, 1992:204).
Figure 6: Yen-Dollar Rates since 1970
We can see that over time the dollar has generally depreciated, but that it has also been volatile. This becomes more apparent when we look at the Yen/dollar rate over a shorter horizon, say since 1990. What is striking about figure 7 is how volatile is the exchange rate between the two largest economies in the world. Notice both short-term and longer-term volatility.
Figure 7: Japanese Yen-Dollar Rates since 1990.
We can similarly look at the dollar -ECU rate, in figure 8. In both pictures the late 1970’s and early 1980’s stand out as periods of extreme volatility. The ECU is the European Currency nit, a basket of EU currencies and a precursor to the Euro. European economies have tried to stabilize the fluctuations of their currencies amongst each other, while letting the basket float against the rest of the world. The EMS was a precursor to the euro. It kept the individual currencies but the governments were obliged to narrow bands. The system suffered a huge crisis in 1993 when the UK, Italy, and Sweden dropped out. This fueled the drive to the euro, where there would no longer be individual currencies to speculate against. Notice that joining the euro is still a serious political issue in both the UK and Sweden. The latter is soon to hold a referendum on joining. All new EU members must adopt the euro. Interestingly, Italy managed to make it in, despite lots of extant skepticism. And now it is Germany and France that violate the rules. Besides looking at bilateral rates it is useful to look at effective or trade-weighted exchange rates. Looking at a single currency is often misleading as the current account balance is the outcome of trade with many countries. Trade-weighted exchange rates given an average for a group of countries based on their shares of trade with the US (in the case of a trade-weighted exchange rate for the dollar). For example, the Fed calculates an index of the dollar’s value based on 10 major currencies. If we look at this picture we see that there are two periods: pre-1971 and post-1973. In the former period the dollar was rather stable. In the period after the collapse of Breton Woods we see much greater volatility. In particular, we see a huge appreciation in the mid-1980’s that followed depreciation in the late 1970’s, and preceded an even larger depreciation in the late 1980’s. This is clear in figure 9 which plots the trade weighted value of the dollar since 1973. Notice the long swings in this rate. It is clearly not rapidly moving to some long-run equilibrium rate.
One might think of various reasons for this behavior in the post-Breton Woods period. Of course, the elimination of fixed exchange rates should have led to more volatility. But should it have been this large? One factor, we shall see is that inflation became much more volatile post-1973, and differences in national inflation rates play an important role in the determination of nominal exchange rates (Pilbeam, 1998:145-147).
We might also look at what happened to the current account during this period. We will proceed to define this much more carefully below. For now we just want to point out some patterns.
Figure 9: Trade-Weighted Exchange Value of the Dollar against Major Currencies
Suffice it for now to consider the current account balance as the sum of net exports (exports minus imports) of goods and services for a country, plus any net transfers. It is a measure of a country’s relations with the rest of the world. If a country has a current account surplus it is acquiring assets from the rest of the world. In the opposite case its debt is increasing.
In figure 10 we have the US current account from 1960 to the present. We can see that the CA balance used to be near zero, but slightly positive. Of course this figure gives the absolute balance. We used to be a large international creditor, and we earned net interest income which offset a tiny deficit in the trade balance. Recently, it has become negative, and quite large. Now we are the largest international debtor in the world. If we look at the period from 1960 to 1973 we see that US current account balances used to be rather small, but on average, slightly positive. Rarely did the balance exceed 1% of GDP until the 1980’s. During this period the overall US position was a net creditor to the rest of the world. In the 1980’s we see rather huge deficits in the current account, figures of almost 4% of GDP. When the current account deficits got so large in the mid-80’s it was quite a shock. Now they are even larger. These are very large magnitudes in terms of recent History, but similar figures were experienced in the 19th century. One reason this occurred is the currency crises of the late 90’s. Developing countries reacted by building up reserves. Oil producing countries have also had big changes in their current accounts, as oil prices were much lower in the mid 90’s. (Valdez & Molyneux, 2010:72). Notice also that some advanced countries have large surpluses, notably Japan and Germany. One reason is saving for their demographic problems to come. But then what about Italy? One other thing to note about the data in figure 12 is the statistical discrepancy. Shouldn’t they all add up to zero? We will discuss this shortly.
Is a large current account deficit bad? Often it is spoken of that way. But then it is interesting to note that Japan — in a 8 year economic slump — has a CA surplus of 2.5% of GDP. Russia, which some term an "economic basket case," has a CA surplus of 13.7% of GDP ($25 billion)!Who is better off? The country that is lending 13% of its GDP to foreigners, or the country that can borrow that from the rest of the world? That is an interesting question. The other side of the large current account deficit is a surplus in the capital account. It is interesting that most people seem to think that a current account deficit is bad and a capital inflow is good. But these are two sides of the same coin. Notice how the patter of the current account is reversed. Notice also the very recent downturn. Many people speak of the current account deficit as being financed by the capital inflow. Then they worry what happens if the latter dries up. Of course, we could also say that the current account deficit is caused by the capital inflow. The excess demand for US assets causes a current account deficit. Spoken this way the CA deficit is a sign of strength. Think of it this way, which is better able to borrow: General Electric or a poor family in an urban ghetto? Note that the long-term debt of GE is around $82 billion at the end of 2000.
A major issue is reform of the IMF. Some question whether the IMF introduces more risk into the system. The issue is moral hazard. Another criticism is that IMF remedies with regard to crises are too painful. Some look for reform to make the system work better. Is it broke? How to fix it? These are complex questions and require an examination of international capital flows. There are related questions regarding the whole issue of globalization. Should the IMF encourage financial liberalization in emerging markets? Do international financial institutions make the system better or worse? Thus, we find the world economy in the oddest of situations: the rest of the world providing low-cost finance to its biggest power.
1. Rodrik Dani, One Economics, Many Recipes,New Jersey, “Princeton University Press”, 2007.
2. Pilbeam Keith, International Finance, London, Macmillan Publishers, 1992.
3. Pilbeam Keith, Finance and Financial Markets, London, Macmillan Publishers, 1998.
4. Valdez Stephen, Molyneux Philip, an Introduction to Global Financial Markets, London, “Palgrave Macmillan”, 2010.