the missing dark matter in the wealth of nations and its implications for global imbalances current account statistics may not be good indicators of the evolution of a country s net foreign assets and of its external position s sustainability the value of existing assets may vary independently of current account flows so called return privileges may allow some countries to obtain abnormal returns and mismeasurement of fdi unreported trade of insurance or liquidity services and debt relief may also play a role we analyse the relevant evidence in a large set of countries and periods and examine measures of net foreign assets obtained by capitalizing the net investment income and then estimating the current account from the changes in this stock of foreign assets we call dark matter the difference between our measure of net foreign assets and that measured by official statistics we find it to be important for many countries analyse its relationship with theoretically relevant factors and note that the resulting perspective tends to make global net asset positions appear relatively stable ricardo hausmann and federico sturzenegger

effects of exchange rate risk on exports crosscountry analysis abstract in this paper we investigate the effects of exchange rate uncertainty on the aggregate exports of 19 developed and 67 developing countries using cross sectional data exchange rate uncertainty is found to be detrimental to the exports of both developing and developed countries developed countries exports however are found to be less sensitive to exchange risk than that of developing countries furthermore within the developing countries those who fixed their exchange rates to one major currency were found to be subject to less risk than the other developing countries

vulnerability to terrorist attacks in european electricity decarbonisation scenarios comparing renewable electricity imports to gas imports the decarbonised future european electricity system must remain secure reliable electricity supply is a prerequisite for the functioning of modern society scenarios like desertec which partially rely on solar power imports from the middle east and north africa may be attractive for decarbonisation but raise concerns about terrorists interrupting supply by attacking the long unprotected transmission lines in the sahara in this paper i develop new methods and assess the european vulnerability to terrorist attacks in the desertec scenario i compare this to the vulnerability of today s system and a decarbonisation scenario in which europe relies on gas imports for electricity generation i show that the vulnerability of both gas and electricity imports is low but electricity imports are more vulnerable than gas imports due to their technical characteristics gas outages and potentially resulting blackouts are the very unlikely consequence even of very high number attacks against the gas import system whereas short blackouts are the potential consequence of a few attacks against the import electricity lines as the impacts of all except extreme attacks are limited terrorists cannot attack energy infrastructure and cause spectacular fear creating outages both gas and electricity import infrastructure are thus unattractive and unlikely terrorist targets

inspiration coalition and substitution external influences on postcommunist transformations there has been a recent explosion of interest in the external influences on the political and economic transformations of postcommunist states this article consolidates several analytical advances in this literature and distills three main functions of external actors namely to lengthen the time horizons of postcommunist politicians to expand the circle of interested reformers and to deter opponents of reform the article argues that a focus on external influences is a growth area for good conceptual work only if it addresses the union of foreign and domestic influences rather than treating them as stylized alternative explanations the central point is that outside actors should be considered as striving to influence the choices of existing domestic actors with whom they can be seen to form a kind of informal coalition at bottom outsiders do best through a combination of strategies strengthening domestic actors already committed to their approach winning over new domestic actors to their priorities and preventing the unconvinced from obstructing reforms

heads i win tails you lose asymmetric taxes risk taking and innovation abstract when multinationals face lower tax rates abroad than in the us transfer pricing strategies generate an asymmetry in the tax rates on a project s profits and losses we show that the tax savings from transfer pricing can be expressed as a long position in a call option we use a model to show that this transfer pricing call option leads a firm to choose riskier and larger projects than it would otherwise thus transfer pricing strategies do not simply reduce a firm s taxes they can influence the scale and types of projects undertaken

the missing wealth of nations are europe and the u s net debtors or net creditors this paper shows that official statistics substantially underestimate the net foreign asset positions of rich countries because they fail to capture most of the assets held by households in offshore tax havens drawing on systematic anomalies in portfolio investment positions and a unique swiss dataset i find that 8 of the global financial wealth of households is held in tax havens 6 of which goes unrecorded on the basis of plausible assumptions accounting for unrecorded assets turns the eurozone officially the world s second largest net debtor into a net creditor it also reduces the u s net debt significantly the results shed new light on global imbalances and challenge the widespread view that after a decade of poor to rich capital flows external assets are now in poor countries and debts in rich countries i provide concrete proposals to improve international investment statistics

why has the united states continued to receive net investment income as a debtor country why has the united states been able to keep receiving net international investment income as a debtor country several authors have pointed out that it is because us direct investments abroad have been generating better returns than have foreign direct investments in the united states however there is no consensus on why this is the case this paper investigates this issue by conducting panel regressions to identify the main determinants of return on us direct investment abroad rusdia and those of return on foreign direct investment in the united states rfdius using data from 49 countries over the 1994 2013 period our findings suggest that the largest contributor to the rusdia rfdius gap is usdia s advantage in the internalisation effect which more than offset any negative age effect the second largest contributor is income shifting activities by us controlled mncs aiming to lower their overall tax payments the third contributor is the negative age effect of inward fdi in the united states which more than offset its weak internalisation effect altogether those effects account for about 50 of the average return gap from 1994 to 2013 the contribution of the risk compensation hypothesis to the return gap is negligible

on the determinants of the success of economic sanctions an empirical analysis theory theories predicting the success of economic sanctions are tested on the universe of sanction episodes from 1914 to 1989 hypotheses the probability of success depends upon the cost to the target nation the extent of trade linkages between target and sender the stability of the target the amount of time sanctions are in force and whether financial sanctions are utilized method data are analyzed using logistic regression results the factors affecting success depend upon the goals of the sending nations when that goal is simply destabilization the principal determinant of success is the initial stability of the target for other goals the use of financial sanctions is most effective we also find evidence of a modest downward trend over time in the relative effectiveness of sanctions in the latter category

determinants of international trade flows the case of developing countries abstract the question of magnitude and the time path of the trade flows to changes in the exchange rates and to changes in the price level is of emitent practical importance to assess the above proposition a distributed lag structure is imposed on the relative prices and on the effective exchange rate as the determinants of trade flows then import and export demand functions are estimated for a sample of developing countries using the almon procedure the empirical findings appeared to sustain orcutt s early conjecture that trade flows adjust differently to different price stimuli more precisely it was found that imports and exports reactions were quicker and the total response time was shorter when an exchange rate rather than relative prices caused a change in international prices

time intensive r d and unbalanced trade abstract this paper highlights a novel mechanism that generates global imbalances it develops a general equilibrium trade model with one of two countries having a comparative advantage in a sector whose production is characterized by i rapid anticipated demand growth and ii large up front r d costs international funding of the accruing r d costs generates capital inflows in the r d stage which are balanced by subsequent outflows importantly sector level growth does not generate growth differentials between countries typically regarded as rationales of global imbalances additionally it is shown that a trade surplus can coincide with appreciations of the real exchange rate i argue that switzerland s trade surplus which was driven to record heights during 2010 2014 by pharmaceutical exports exemplifies this mechanism calibrating the model to swiss trade flows underpins this argument

technology capital and the us current account the u s bureau of economic analysis bea estimates the return on investments of foreign subsidiaries of u s multinational companies over the period 1982 2006 averaged 9 4 percent annually after taxes u s subsidiaries of foreign multinationals averaged only 3 2 percent two factors distort bea returns technology capital and plant specific intangible capital technology capital is accumulated know how from intangible investments in r d brands and organizations that can be used in foreign and domestic locations used abroad it generates profits for foreign subsidiaries with no foreign direct investment fdi plantspecific intangible capital in foreign subsidiaries is expensed abroad lowering current profits on fdi and increasing future profits we develop a multicountry general equilibrium model with an essential role for fdi and apply the bea s methodology to construct economic statistics for the model economy we estimate that mismeasurement of intangible investments accounts for over 60 percent of the difference in bea returns

domestic or global imbalances rising income risk and the fall in the us current account when default leads to exclusion from financial markets the implied loss of consumption smoothing opportunities is more costly when income volatility is high a rise in income risk thus makes default less attractive allowing creditors to relax borrowing limits i show how in an open economy this endogenous financial deepening may reduce aggregate foreign assets in response to a rise in individual income risk against the precautionary savings intuition conditions for this depend on whether default constrains complete or uncontingent contracts the post 1980 rise in us household income risk strongly reduces foreign assets when domestic markets are complete or world interest rates low

cross border returns differentials were the u s to persistently earn substantially more on its foreign investments u s claims than foreigners earn on their u s investments u s liabilities the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases however we find that the returns differential of u s claims over u s liabilities is far smaller than previously reported and importantly is near zero for portfolio equity and debt securities for portfolio securities we confirm our finding using a separate dataset on the actual foreign equity and bond portfolios of u s investors and the u s equity and bond portfolios of foreign investors in the context of equity and bond portfolios we find no evidence that the u s can count on earning more on its claims than it pays on its liabilities finally we reconcile our finding of a near zero returns differential with observed patterns of cumulated current account deficits the net international investment position and the net income balance jel codes f3

the value and ownership of intangible capital abstract intangible capital which relies on essential human inputs or organization capital presents a unique challenge for measurement organization capital cannot be fully owned by firms fina

are smart sanctions feasible this article reviews the literature on the smart sanctions approach developed in the late 1990s in response to the failure of conventional sanctions and questions the efficacy of this instrument smart sanctions modify the conventional sanctions tool by targeting the culpable political elites by means of arms embargoes financial sanctions and travel restrictions and by cushioning vulnerable groups children women the infirm and the elderly by exempting specified commodities such as food and medical supplies from embargoes this two pronged sanctions approach is designed to hit the real perpetrators directly and spare potential innocent victims thus leading to the speedier change of sanctionee behavior although the special design of smart sanctions may seem logically compelling and politically attractive this article argues that the numerous operational problems involved combined with the intricacies of the political processes of the un security council will make a smart sanctions regime difficult to establish and enforce effectively

a quantitative assessment of the decline in the u s current account low frequency changes in the u s current account can be understood in terms of the influence of differences in productivity growth rates across time and across countries using standard growth theory in particular the secular decline is primarily driven by the increase in the u s tfp growth rate relative to its trading partners differences in population growth rates or fiscal policy have no significant effects on the low frequency changes in the u s current account

the hidden hand of economic coercion why do policymakers consistently employ economic sanctions even though scholars consider them an ineffective tool of statecraft game theoretic models of economic coercion suggest the success rate may be understated because of selection effects when the targeted country prefers conceding to incurring the cost of sanctions it has an incentive to acquiesce before the imposition of sanctions the bulk of successful coercion episodes should therefore end with sanctions threatened but not imposed this contradicts the recent literature on sanctions which assumes that sanctions rarely if ever work at generating significant concessions from the targeted country and are imposed for domestic or symbolic political reasons if the game theoretic argument is correct the crucial cases to study are those in which coercion is threatened but not implemented a statistical analysis of data on sanctions in pursuit of economic or regulatory goals strongly supports the gametheoretic argument these results suggest that the significance of economic coercion has been undervalued in the study of statecraft and international relations more generally

the risk premium and long run global imbalances this study proposes that heterogeneous household portfolio choices within a country and across countries offer an explanation for global imbalances we construct a stochastic growth multi country model in which heterogeneous agents face the following restrictions on asset trade first the degree of us equity market participation is higher than that of the rest of the world second a fraction of households in each country maintains a fixed share of equity in its portfolios in our calibrated model which matches the us net foreign asset position and the equity premium the average us household loads up more aggregate risk than the average foreign household by investing in risky assets abroad and issuing risk free assets as a result the us is compensated by a high risk premium and runs trade deficits even as a debtor country the long run average trade deficit in our model accounts for 50 of the observed us trade deficit

exports growth and causality in ldcs abstract using akaike s optimal lag criterion in a granger causality test the causal relationship between export growth and economic growth and vice versa is re examined for 20 countries it is argued that earlier analyses which ignore optimal lags in granger or sims causality tests suffer from certain shortcomings which are overcome by the present approach the results suggest some support for the export promotion hypothesis especially in the case of well known nics and thus differ from previous applications of granger test which did not adopt an optimum lag criterion and which showed no causality from export growth to economic growth in such cases however they are inconclusive in evaluating competing hypotheses

discussion on gross capital flows dynamics and crises by broner didier erce and schmukler international capital flows have always been an important topic in international economics capital flows help a country exploit better investment opportunity and smooth consumption over the past few years global current account imbalances have been at the forefront of policy debates large amount of research devotes to the study of net capital flows while fewer works put their focus on gross capital flows this paper fills the gap this paper provides a systematic analysis over business cycle behavior of gross capital flows it looks at 103 countries between 1970 and 2009 the countries are divided into three groups lower middler income upper middler income and high income countries three forms of capital flows are examined direct investment portfolio and other investments to study impact of crisis over gross capital flows it also classifies financial crisis into different types banking crisis currency crisis and domestic debt and external debt crisis the paper has the following key findings first both gross capital inflows and outflows increase relative to gdp trend over period of time second gross flows are larger and more volatile than net flows third gross inflows and outflows are positively correlated especially for high income countries lastly both inflows and outflows are procyclical and shrink during crises decline of capital flows during crises is observed in all forms direct investment portfolio and other investments broner et al raise a new challenge for the international literature standard international real business cycle model as in backus et al 1992 mostly has one asset and cannot address issues related to global capital flows this paper calls for a unified theory to model gross capital flows and to account for the key findings in this paper one candidate is the literature on portfolio choices this literature mainly focuses on long run composition of portfolios the so called home bias puzzle in asset french and poterba 1991 first pointed out american held roughly 94 of their equity wealth in the us stock market heathcote and fabrizio 2007 give a review over the findings in this literature two exceptions hnatkovska 2010 and tille and wincoop 2010 study cyclicality of gross capital flows their models however generate counterfactual capital flows as pointed out by broner et al in this discussion i focus on new theories that have the potential to explain co movement of capital inflows and outflows

sweat equity in u s private business in this paper we first provide evidence that existing measures of business incomes and valuations based on widely used surveys such as the survey of consumer finances are mismeasured we then develop a theory disciplined by u s national accounts and business census data to measure net incomes and private business sweat equity which is the value of time to build customer bases client lists and other intangible assets we estimate an aggregate sweat equity value of 0 65 times gdp with little cross sectional dispersion in valuations when compared to business net incomes and large cross sectional dispersion in rates of return our estimate of sweat equity is close to the estimate of marketable fixed assets used in production by private businesses implying a high ratio of intangible to total assets we use the model to evaluate the impact of greater tax compliance of private businesses and lower tax rates on the net income of both privately held and publicly traded businesses we find larger sectoral and aggregate effects from the tax policy experiments relative to studies that abstract from private business and in particular the accumulation of sweat capital finally we show that our results are robust to including non pecuniary benefits of business ownership

prosperity and depression prosperity and depression are relative concepts today both france and japan are depressed relative to the united states equivalently the united states is prosperous relative to these countries i say these countries are depressed relative to the united states because their output per working age person is 30 percent less than the u s level an interesting and important policy question is why are these countries depressed the answers for these two countries turn out to be very different the united states is prosperous relative to france because the u s intratemporal tax wedge that distorts the trade off between consumption and leisure is much smaller than the french wedge i will show that if france modified its intratemporal tax wedge so that its value was the same as the u s value french welfare in consumption equivalents would increase by 19 percent consumption would have to increase by 19 percent now and in all future periods to achieve as large a welfare gain as that resulting from this tax reform the united states is prosperous relative to japan because production efficiency is higher in the united states in the united states total factor productivity is approximately 20 percent higher than in japan if japan suddenly became as efficient in production as the united states its welfare gain in consumption equivalents would be 39 percent equally interesting and important are big changes over time in relative output per working age person across countries why are new zealand s and switzerland s economies depressed by over 30 percent relative to their 1970 trend corrected levels both of these countries have small populations but depressions are not restricted to small countries japan with its 125 million people is now depressed by 20 percent relative to its 1991 trend corrected level on the prosperity side why are ireland and south korea so prosperous now relative to their 1970 trend corrected levels this lecture is concerned primarily with big international differences among relatively rich industrial countries and changes in these differences over time the countries that receive primary attention all have market economies and healthy well educated populations in the countries considered the variations in aggregate output per working age person are large and reasonably good measures of the factor inputs are available this permits in many cases the identification of the change in policy or the difference in policy that gave rise to prosperity or depression this is in contrast to business cycle theory which provides little guidance to policy except for the important policy implication that a stabilization effort will have either no effect or a perverse effect the output variations studied and analyzed in this lecture are big an order of magnitude larger than the much studied business cycle fluctuations the variations studied however are an order of magnitude smaller than the muchstudied differences between the richest and poorest countries surprisingly only recently have depressions been systematically studied from the perspective of growth theory which is the theory used university of minnesota and federal reserve bank of minneapolis i thank my colleagues at the university of minnesota and the federal reserve bank of minneapolis for helpful discussions and comments in particular i thank tim kehoe ellen mcgrattan and nancy stokey for their help i also thank martin weale and franck portier for providing some british and french tax information used in this lecture thanks also go to sami alpanda and james macgee for research assistance and helpful discussions this lecture draws heavily on collaborative research with fumio hayashi i thank the economic and social research institute cabinet office government of japan and the u s national science foundation for financial support the views expressed herein are those of the author and not necessarily those of the federal reserve bank of minneapolis or the federal reserve system

when do imposed economic sanctions work previous research has documented only a modest success rate for imposed sanctions by contrast the success rate is higher in cases that are settled at the threat stage in this article the authors provide new insights about the circumstances under which sanctions cause behavioral change only after being imposed first the target must initially underestimate the impact of sanctions miscalculate the sender s determination to impose them or wrongly believe that sanctions will be imposed and maintained whether it yields or not second the target s misperceptions must be corrected after sanctions are imposed a game theoretical model with incomplete information is used to develop and clarify the argument

migrants ancestors and foreign investments we use 130 years of data on historical migrations to the u s to show a causal effect of the ancestry composition of u s counties on foreign direct investment fdi sent and received by local firms to isolate the causal effect of ancestry on fdi we build a simple reduced form model of migrations migrations from a foreign country to a u s county at a given time depend on 1 a push factor causing emigration from that foreign country to the entire u s and 2 a pull factor causing immigration from all origins into that u s county the interaction between time series variation in origin specific push factors and destination specific pull factors generates quasi random variation in the allocation of migrants across u s counties we find that doubling the number of residents with ancestry from a given foreign country relative to the mean increases the probability that at least one local firm engages in fdi with that country by 4 percentage points we present evidence that this effect is primarily driven by a reduction in information frictions and not by better contract enforcement taste similarities or a convergence in factor endowments