Transcript Three Current Account Balances: A Semi

Three Current Account Balances:
A Semi-structuralist Interpretation
Menzie D. Chinn
Jaewoo Lee
The views expressed in this paper are those
of the authors and should not be attributed to
the NBER, the International Monetary Fund,
its Executive Board, or its management.
Unprecedented CA deficit
130
120
110
100
90
.02
80
.00
70
-.02
-.04
-.06
-.08
80 82 84 86 88 90 92 94 96 98 00 02 04
USCAY (BEA, SA)
REER
A Hundred Views
• Savings glut / investment drought:
Bernanke (2005), Chinn and Ito (2005)
• Fed Sigma vs IMF GEM, on fiscal effect
• Event studies: Freund and Warnock
(2005), Galati and Debelle (2005)
• Portfolio preference/ Valuation: Blanchard
et. al (2005), Gourinchas and Rey (2005),
Lane and Milesi-Ferretti (many), Tille
(many), and others
Looking at CA and ER together
• Impose a little structure: decompose
shocks into those that have a permanent
effect on ER and the rest
• Consistent with NOEM models, including
an example in Lee & Chinn (2006)
• Nominal shocks have no long-run effect on
REER when NFA is stationary.
• Productivity shocks can have long-run
REER effects (e.g. Balassa-Samuelson).
• Motivated by the intertemporal view of CA
(intertemporal dimension)
• Not all the way to the present value model
of CA--too tight a restriction
• PVM papers that illustrate the importance
of prices:
Bergin & Sheffrin (2000)--exchange rates
Nason & Rogers (2006)--risk premium
What’s this paper to do with
imbalances?
• In the earlier paper, the two types of
shocks generate different patterns of
correlation between CA and ER.
• The exchange rate effects of temporary
shocks are bound to reverse course.
• Implications on the prospects for the ER
movement and the sustainability of CA.
As a decomposition exercise
• According to the long-run effect on the real
exchange rate, with no a priori sign restriction.
• Shocks with temporary ER effect bring about the
usual negative correlation between ER and
CA—ER depreciation with CA improvement; ER
appreciation with CA deterioration.
• The correction of CA deficit due to “temporary”
shocks will be accompanied by ER depreciation.
Relating to other imbalance papers
• Compared to Obstfeld and Rogoff
(2004/05), we empirically look for the
portion of CA adjustment to be associated
with ER depreciation.
• Based on time series data, in contrast to
event study or cross-country evidence.
• Econometric, in contrast to DSGE.
The BQ decomposition
• Bi-variate VAR, estimated for the current
account and the first-differenced real
exchange rate. Temporary shock—no
permanent effect on ER
 tT 
 cat 
 cat 
 q   B( L)  q   B(0)  P 
 t
 t
 t 
Data for estimation
• Quarterly data, SA, current account to
GDP ratio; log difference of the CPI-based
REER
• U.S., 1980Q1 (Q4) - 2001Q4, adjusted for
the Gulf War transfers of the early 1990s
• Japan, 1980Q1 (Q4) - 2004Q3
• Euro area, 1980Q1 (Q4) - 2004Q4, current
account data from EABCN
U.S. Impulse Response
Response of CA to Temporary Shock
Response of CA to Permanent Shock
.0024
.0024
.0022
.0022
.0020
.0020
.0018
.0018
.0016
.0016
.0014
.0014
.0012
.0012
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9
10
1
Response of DRE to Temporary Shock
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Response of DRE to Permanent Shock
.02
.02
.01
.01
.00
.00
-.01
-.01
-.02
-.02
-.03
-.03
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Response of CA to Temporary Shock
Response of CA to Permanent Shock
.0024
.0024
.0020
.0020
.0016
.0016
.0012
.0012
.0008
.0008
.0004
.0004
2
4
6
8 10 12 14 16 18 20 22 24 26 28 30
2
Response RE to Temporary Shock
6
8 10 12 14 16 18 20 22 24 26 28 30
Response of RE to Permanent Shock
.05
.05
.04
.04
.03
.03
.02
.02
.01
.01
.00
.00
-.01
-.01
-.02
-.02
-.03
4
-.03
2
4
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8 10 12 14 16 18 20 22 24 26 28 30
2
4
6
8 10 12 14 16 18 20 22 24 26 28 30
Candidate shocks
• Temporary shocks:
– monetary shocks
– real shocks that entail temporary appreciation and CA
deficit
– productivity shock without REER effect?
• Permanent shocks:
– preference shocks, e.g. in favor of home exports
(appreciation and CA surplus)
– government spending (negative preference shock)
– oil price?
Temporary shocks correspond to
the typical view of adjustment
• The imbalance (read deficit) of current
account that is caused by temporary
shocks will have been accompanied by
REER appreciation.
• Resolution in a reverse movement, namely
improving CA and depreciation.
• Kim and Roubini (2000) : monetary
stimulus --> impact depreciation, followed
by gradual appreciation.
Different with permanent shocks
• Current account deficit caused by
permanent shocks will have been
accompanied by REER depreciation.
• Moreover, the resolution of the deficit will
not necessarily involve much further
movement in REER—no subsequent
reverse movement in REER to follow.
U.S. Current Account
.01
.00
-.01
-.02
-.03
-.04
-.05
-.06
-.07
82 84 86 88 90 92 94 96 98 00 02 04
CAUS
Non-transitory
Deterministic
U.S. Exchange Rate
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100
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82 84 86 88 90 92 94 96 98 00 02 04
REUS
Non-transitory
U.S. External Balance
• CA deficit of 5.7 percent of GDP (in 2004)
may decline to 4.1 percent of GDP,
accompanied by further ER depreciation
• ER depreciation of 10-20 percent
• CA deficit to decline ultimately to about 3
percent of GDP, not involving ER
• CA deficit and stable external debt-to-GDP
ratio fully compatible
Natural not to expect zero balance
Figure 1. Global Distribution of Current Accounts, 1960-2003
(in percent of GDP)
1960
1970
1990
2003
1980
0
-20
-15
-10
-5
0
Current Accounts
5
10
15
20
Euro Area
.08
.04
.00
-.04
-.08
-.12
82 84 86 88 90 92 94 96 98 00 02 04
CAEU
Non-transitory
Deterministic
Japan
.05
.04
.03
.02
.01
.00
-.01
82 84 86 88 90 92 94 96 98 00 02 04
CAJA
Non-transitory
Deterministic
Euro and Japan
• Not much evidence of external imbalance,
though small surplus driven by temporary
shocks
• The adjustment to entail some real
appreciation, a bit more for Japan
• Implies other counterparts to the U.S.
deficit than the euro area or Japan
Conclusion
• Via a bivariate decomposition, substantial
CA adjustment for the U.S., accompanied
by ER depreciation
• An important qualification—difficulty to
model 2002-04: an uncharted territory or
slow return to normalcy?
• Portfolio preference, very broadly
construed?
• Counterparts?