Вы находитесь на странице: 1из 34

Slides for Chapter 6:

External Adjustment in Small and Large Economies

International Macroeconomics

Schmitt-Grohé Uribe Woodford

Columbia University

May 1, 2016

1
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

A Graphical Approach to Studying External Adjustment in


Small and Large Economies

We will derive a current account schedule: CAt = CA(rt; . . . ). This


will be helpful to analyze adjustment in the current account to
macroeconomic disturbances.

2
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Recall the Investment Schedule from Chapter 5:

I1 = I( r1; A2, . . . )
− +

r1

← I(r1 ; A2 )

I1

3
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Shifter of the Investment Schedule

• A2 ↑, then schedule shifts up and to the right

4
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Introduce the Savings Schedule Results of Chapters 3 and 5 imply...

S1 = S( r1; Q1 Q2, . . . )
+ + −

r1
S1 (r1 ; Q1 , Q2 )

5
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Shifters of the Savings Schedule

• Q1 ↑, S(r) shifts right.

• Q2 ↑, S(r) shifts left.

6
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

The Current Account Schedule

CA = S − I

CA(r) = S(r) − I(r)

7
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Draw the savings and investment schedule in the same graph:

Given r, horizontal difference gives: S − I, which is the current


account.

r (a) (b)
1 r
1
S(r , Q )
1 1 CA(r )
a 1
a r
r

c
c r
r

b
b r
r

I(r )
1

S, I 0 CA

8
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Current Account Determination in a Small Open


Economy

small ⇔ r = r∗, with r∗, the world interest rate given.

r1
CA1 (r1 ; . . .)

A
r ∗ r∗ , world interest rate

CA(r∗ ) 0 CA1
9
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Now use the graphical apparatus to analyze current account adjustment


to:

1. An increase in the world interest rate, r∗ ↑.

2. A temporary output shock, Q1 ↑.

3. A future productivity shock, A2 ↑.

4. Expected future terms of trade depreciation.

10
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

1.) Current account adjustment to an increase in the world


interest rate

r1
CA(r1, Q1)

r*1

r*o

CA0 CA10 CA

11
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

2.) Current account adjustment to a temporary increase in


output
r1 (a) (b)
r
1
I(r1) S(r1, Q01) S(r1, Q11)
CA(r1, Q01)

CA(r1, Q11)
o
rc

1
rc

r* r*

So1 S11 Io1 S, I CAo1 CA11 0 CA

12
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

3.) Current account adjustment to a future increase in productivity


r1 (a) (b)
r
1
Io(r ) I1(r ) S1(r , Q ) CA1(r1, Q1)
1 1 1
o
1
CAo(r , Q )
1 1
S (r , Q )
1 1

r1
c

ro
c

* *
r r

1
S1 S1
o o
I1
1
I1 S, I CA1 CAo 0 CA
1 1

13
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

4.) Expected future terms of trade depreciation.


r1 (a) (b)
r1
I(r ) S(r , Q0) S(r , Q1)
1 1 1 1 1
CA(r , Q0)
1 1

CA(r , Q1)
1 1
roc

1
rc

r* r*

So S1 Io S, I CAo CA1 0 CA
1 1 1 1 1

14
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Current Account Determination in a

Small Open Economy with

an Interest Rate Risk Premium

15
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

r1 = country interest rate

r∗ = world interest rate

Typically, r1 >> r ∗ for emerging market debtors. Why? Because of


positive country risk premia.

p ≡ r1 − r∗ = country risk premium

or
(
r∗ + p if country is a debtor
r1 =
r∗ if country is a creditor

16
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Current account determination in the presence of a constant risk


premium

r1
CA(r1, Q1)

r*+p
*
r

CAo 0 CA

17
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Current account determination in the presence of an increasing risk


premium

r
1

CA1(r1, Q1) CAo(r1, Q1)

*
r +p(−CA)

r*

CA11 CA01 0 CA

18
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Equilibrium in a Large Open Economy

large → r 6= r∗.

Instead r is such that

CA(r) + CAROW (r) = 0

ROW = rest of the world

19
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Current account determination in a large open economy

r
US′
RW CA US
CA CA

D′

B D
C A

CARW 0 CAUS

20
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Bernanke’s Global Saving Glut Hypothesis

Ben S. Bernanke, “The Global Saving Glut and the U.S. Current
Account Deficit,” Homer Jones Lecture, St. Louis, Missouri, April
14, 2005.

21
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Bernanke observes that between 1996 and 2004 the U.S. current
account has greatly deteriorated:
CA ($ bn) CA/GDP (in %)
1996 -125 -1.5
2000 -411 -4.0
2004 -634 -5.2
Note. These numbers differ slightly from those reported in Bernanke’s speech, because the

numbers in the table are revised numbers from the March 19, 2015 release.

22
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Current Account Deterioration in Nominal Terms


100

1996 → ← 2004

−100

−200
Billions of Dollar

−300

−400

−500

−600

−700
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Year

Data Source: Bureau of Economic Analysis.

23
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

While not quite as dramatic as in nominal terms, current account


deterioration also large in real terms ...
2

1996 → ← 2004

−1
Percent of GDP

−2

−3

−4

−5

−6
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Year

Data Source: Bureau of Economic Analysis.

24
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Bernanke then asks what accounts for this dramatic CA deterioration.

He suggests two alternative explanations:

• Hypothesis 1: (“Made in the U.S.A.”) The CA deterioration


primarily reflects developments inside the United States and is independent
of developments in other parts of the world.

• Hypothesis 2: (Global Saving Glut) The CA deterioration was due


to external factors, that is, due to developments in the rest of the
world (and hence not under U.S. control).

25
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

“Made in the U.S.A.” Hypothesis

The U.S. decided to save less and invest more ⇒ U.S. current
account schedule shifts up and to the left.

Why? Financial innovation induced low private savings rates and


over-investment in residential housing.

Global Saving Glut Hypothesis:

Over the past decade there was a significant increase in the global
supply of savings— a global saving glut ⇒ current account schedule
of the rest of the world shifts down and left

Why? (1) Emerging markets are accumulating foreign reserves to


prepare for future crises and avoid the experience of the 1990s. (2)
Export-led growth (brought about via exchange rate manipulation
— undervalued currency). (3) Foreign (developed) countries are
saving more in preparation for an aging population.
26
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

The “Made in the U.S.A.” Hypothesis versus Global Saving Glut Hypothesis

“Made in the U.S.A.” Hypothesis Global Saving Glut Hypothesis


r RW0 r
CAU S0 (r) CA (r)
CARW (r)
CARW (r) CAU S (r)

B CAU S (r)
r∗1
A
r∗o

A B
r∗o r∗1

o o
CARW CAU S
1
0 CAU S CAU S CARW CAU S
1
0 CAU S CAU S

27
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

How can we tell the Global Saving Glut Hypothesis and the
“Made in the U.S.A.” Hypothesis apart?

Both hypothesis imply that the U.S. current account deteriorates.

BUT

the global savings glut hypothesis predicts that interest rates fall
whereas the “Made in the U.S.A.” hypothesis predicts that interest
rates rise.

So we can use the observed behavior of interest rates to tell the two
hypotheses apart.

28
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

How to construct the real interest rate?

rt = real rate between period t and t + 1

it = nominal interest rate between t and t + 1

πt+1 ≡ Pt+1/Pt = gross rate of inflation between t and t + 1

Et = expectations operator conditional on information in period t

Use the Fisher equation,


(1 + it )
1 + rt = ,
Et πt+1
which says that the real rate equals the nominal rate minus expected
inflation.

it measured by 1-year Treasury rate.


29
πt measured by annual CPI inflation rate.

How to measure expected inflation, Et πt+1 ? We assume that πt+1 =


Et πt+1 for simplicity.

Alternatively, one could run a regression of 1/πt on its own lags.


International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

The World Real Interest Rate: 1994-2004


4

1996 → ← 2004

2
Percent per year

−1

−2
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Year

Note. The world real interest rate is approximated by the difference between the rate on 1-year U.S. Treasury securities and 1-year ex post CPI inflation.

30
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

The World Real Interest Rate: 1992-2012


4

3
Percent per year

−1
1995 2000 2005 2010
Year
Note. The world real interest rate is approximated by the difference between the rate on 10-year U.S. Treasury securities and 10-year expected inflation.

30
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

The figure shows that real interest rates fell, which is consistent
with the Global Savings Glut Hypothesis and inconsistent with the
“Made in the U.S.A.” hypothesis.

31
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford

Finally, can the Saving Glut Hypothesis be used to rationalize the


improvement in the U.S. current account after 2006? The argument
would go as follows. After 2006 the rest of the world decided to
save less and invest more, hence the CA schedule of the ROW
would have shifted up and to the right. As a result the CA balance
of the U.S. would have improved. What would have happened to
interest rates? They should have gone up. However, this is not what
happened, interest rates fell even further during the Great Recession,
suggesting that a subsiding of the savings glut is not the reason for
the improvement in the U.S. current account post 2006.

32