sustainability of external imbalances in the oecd countries the authors wish to thank three anonymous referees for helpful comments to a previous version financial support from the spanish institute for fiscal studies the spanish ministry of economy and competitiveness projects eco2011 29314 c02 02 o bajo rubio and c diaz roldan and eco2011 30260 c03 01 v esteve and the department of education and science of the regional government of castilla la mancha project peii09 0072 7392 is also gratefully acknowledged v esteve also acknowledges support from the generalitat valenciana project gvprometeo2009 098

advantageous reallocations a constructive example this note shows how to construct smooth examples of a phenomenon noted by gale in which a pair of agents make themselves better off at the expense of a third agent by reallocating their own endowments walrasian stability prevails

credit growth current account and financial depth exploring the determinants and dynamics of the current account balance is one of the priorities of academic literature and policy circles although the effects of structural variables are deeply analysed a lesser attention has been paid to the impact of financial variables drawing on standard empirical current account models and with a large sample of industrial and developing countries we report a significant deterioration in the current account balance in case of an increase in the credit growth moreover we find that this link is substantially stronger for the developing ones motivating a closer examination therefore we further advance our analysis and show that credit growth causes a stronger impact on the current account balance for lower levels of financial depth in other words at the early stages of financial development acceleration in the credit growth might cause a larger deterioration in the current account balance thus it might be suggested that monetary policy and macro prudential

current account adjustment in the eurozone lessons from a flexible price model this paper discusses the desired size of the internal devaluation in the eurozone for a scenario of current account adjustment induced by shifts in relative demand based on obstfeld and rogoff i develop a four region model of the world economy consisting of the eurozone core eurozone periphery united states and asia in contrast to most of the existing literature this model structure enables studying the impact of global current account adjustment on the rebalancing process in the eurozone in addition the model allows for movements of factors of production between tradable and non tradable sectors the results point to the important impact of sectoral reallocation and increases in asian demand on the size of the internal devaluation as well as on the implied length of the adjustment period

equilibrium exchange rates and supply side performance this paper develops a two country optimising sticky price model of real exchange rate determination in the new open macroeconomics tradition which allows several different forms of deviation from purchasing power parity ppp both along the adjustment path and in the steady state the model has a rich structure and is designed to provide a flexible tool for policy analysis unlike most other papers in the literature both of the key components of the real exchange rate the relative price of non tradables and the terms of trade are made endogenous allowing a more complete analysis of the impact of structural shocks to illustrate one possible application the model is calibrated to match key elements of the uk and euro area economies and used to examine the extent to which possible improvements in the united kingdom s relative supply side performance might account for the sharp and persistent appreciation in sterling since 1996 the results are not supportive of this hypothesis in the model improvements in productivity goods market and labour market competitiveness are all associated with a depreciation in both the spot and the equilibrium real sterling exchange rates two potential supply side sources of an equilibrium appreciation a productivity improvement biased towards traded goods balassa samuelson effect and an anticipated future productivity rise are considered however each is insufficient to account for a long run equilibrium appreciation the latter may account for an initial appreciation of the real exchange rate we conclude by considering further mechanisms that could affect our results

foreign ownership and the theory of trade and welfare some standard topics in the theory of international trade are reconsidered in this paper by distinguishing between national and aggregate income when fixed supplies of foreign inputs are present within the home country under conditions that would ensure a national welfare gain if foreign ownership were absent international transfer economic growth or tariff policy might cause a national welfare loss in the presence of foreign ownership the techniques developed could be applied to other domestic distinctions such as those based on race sex age or ethnicity and to the theory of customs unions in a three country world

bilateral portfolio dynamics during the global financial crisis abstract there has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis for a given destination investors from different countries adjusted their holdings to different degrees we show that the size of the initial bilateral holding geographical distance common language the level of trade and common institutional linkages help to explain the pattern of adjustment these bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries

international investment and immiserizing growth abstract a country with significant foreign investment can be immiserized by growth of its labor force because this increases the payments that have to be made to foreign investors we show that this occurs when the elasticity of supply of foreign capital and the elasticity of substitution between labor and capital in the host country are low we relate this phenomenon to bhagwati s general analysis of immiserizing growth and identify several new sources of immiserization that can arise from the interaction of the bhagwati johnson mechanisms and international investment

asymmetric effects of endowment changes on foreign investment source and host countries this paper explores the asymmetric impact of factor endowment changes on foreign investment source and host countries using a ricardo wilson multifactor continuum of goods model where there is a technological basis for trade even if the countries are equivalent in all respects except for capital endowments it is discovered that host country capital growth must be immiserizing in the source country provided that the two countries are initially alike in all respects except for capital endowments while a stringent single good macdougall kemp restriction suffices to guarantee that source country labor growth is immiserizing in the host country initial equivalence between countries is insufficient

international capital flows and the boom bust cycle in spain we study the joint dynamics of foreign capital flows and real activity during the recent boom bust cycle of the spanish economy using a three country new keynesian model with credit constrained households and firms a construction sector and a government we estimate the model using 1995q1 2013q2 data for spain the rest of the euro area rea and the rest of the world we show that falling risk premia on spanish housing and non residential capital a loosening of collateral constraints for spanish households and firms as well as a fall in the interest rate spread between spain and the rea fuelled the spanish output boom and the persistent rise in foreign capital flows to spain before the global financial crisis during and after the global financial crisis falling house prices and a tightening of collateral constraints for spanish borrowers contributed to a sharp reduction in capital inflows and to the persistent slump in spanish real activity the credit crunch was especially pronounced for spanish households firm credit constraints tightened later and more gradually and contributed much less to the slump

the great moderation in international capital flows a global phenomenon abstract this paper highlights a recent great moderation in global capital flows characterised by smaller volumes and lower volatility of cross border transactions however there are substantial differences across countries and regions which we analyse by comparing the level of international capital flows observed in 2005 06 immediately prior to the onset of the global financial crisis to the post crisis period of 2013 14 when global flows arguably settled at a new normal we find that since the pre crisis period gross capital inflows recovered more for economies with smaller pre crisis external and internal imbalances lower per capita income improving growth expectations a less severe impact of the global financial crisis and less stringent macroprudential policy on the asset side countries with a more accommodative monetary policy a milder impact of the crisis and oil exporters managed to increase gross capital outflows in the post crisis period

immiserizing investment from abroad the singer prebisch thesis reconsidered the present paper lends new analytical support to the controversial singer prebisch thesis according to this well known thesis less developed countries ldcs suffer a welfare loss from secular decline in their international terms of trade for primary product exports the standard theoretical criticism of the thesis makes two basic arguments both relating to the impact of economic expansion 2 first there is no well established presumption that the terms of trade for primary products will indeed deteriorate in a growing world economy second if domestic economic expansion does happen to worsen the terms of trade for ldcs economic welfare of these countries still need not deteriorate except under bhagwati s 1958 well known conditions for immiserizing growth thus the traditional critique sees the singer prebisch thesis as an unconvincing allegation about the relationship between growth and welfare via the terms of trade the following discussion suggests an alternative more favorable interpretation of the thesis this reinterpretation focuses upon the process of foreign investment4 rather than economic growth as the essential reason for adverse changes in the terms of trade and level of welfare for ldcs exporting primary products such a focus appears to be fully consistent with the analysis of singer 19501 5 whose main

current account core periphery dualism in the emu current account ca dispersion within european union eu member states has been increasing progressively since the 1990s interestingly the persistent deficits in many peripheral countries have not been accompanied by a significant growth process able to stimulate a log run rebalancing as neoclassical theory predicts to shed light on the issue this paper investigates the determinants of eurozone ca imbalances focusing on the role played by financial integration the analysis considers two samples of 22 oecd and 15 eu countries three time horizons corresponding to various steps in european integration different control variables and several panel econometric methods the results suggest that within the eu group of countries financial integration contributed to explain the ca deterioration in the peripheral countries especially in the post emu period creating an asymmetric behaviour within the emu from a financial stability perspective this divergence could hinder the effectiveness of monetary policy by reducing the apparent benefits of participating in the monetary union it also raises the risk of a break up

the generalized theory of transfers and welfare bilateral transfers in a multilateral world paul samuelson s 1952 1954 classic papers on the transfer problem addressed two separate analytical issues the positive effect of a transfer on the terms of trade and the welfare effect of the transfer on the donor and the recipient since then a considerable body of literature has grown up on the positive analysis while samuelson 1954 himself had extended the 2 x 2 x 2 free trade analysis to allow for tariffs and transport costs subsequent writers have analyzed other extensions of the model for example to allow for nontraded goods as with leisure in samuelson 1971 or general nontraded goods in john chipman 1974 and ronald jones 1970 1975 remarkably however the welfare analysis of transfers has not paralleled these developments since wassily leontief 1936 produced an example of immiserizing transfer from abroad and samuelson 1947 argued that the example required market instability the proposition that has monopolized attention has been that a transfer in the conventional 2 x 2 x 2 model in its free trade version cannot immiserize the recipient or enrich the donor as long as world markets are stable in the walras sense interestingly samuelson 1954 who did extend the positive analysis to include tariffs did not go on to ask whether immiserization of the transfer recipient and hence symmetrically enrichment of the donor in a two country model could now arise consistent with market stability recently the welfare analysis of transfers has been extended in two different directions both apparently unconnected and both yielding the conclusion that transfers from abroad can be immiserizing and that the donor may improve its welfare despite market stability one route to this conclusion has been the introduction of a third economic agent or country that is outside of the transfer process in the appendix of his 1960 paper analyzing the interaction between trade policy and income distribution harry johnson discussed the possibility of welfareparadoxical redistribution between two factor income classes capital and labor in an open economy thereby providing what can be interpreted as a treatment of the threeagent transfer problem for the case in which donor and recipient are both completely specialized in the ownership of a single different factor an independent analysis of the three agent transfer problem using a restrictive model with given endowments of goods and fixed coefficients in consumption was also undertaken in an important paper by david gale 1974 2 brecher and bhagwati bhagwati department of economics columbia university new york ny 10027 brecher department of economics carleton university ottawa on kis 5b6 hatta department of political economy the johns hopkins university baltimore md 21218 we thank the national science foundation grant no 524718 for partial financial support of the research underlying this paper the paper was written when brecher and hatta were visiting columbia university 1981 82 gratefully acknowledged are helpful comments and suggestions from john chipman avinash dixit jacques dreze robert feenstra jacob frenkel ronald jones murray kemp andreu mas colell michael mussa john riley lars svensson and robert willig from anonymous referees and from seminar participants at berkeley harvard minnesota rochester chicago and the university of california los angeles after the present paper was submitted for publication and following its presentation at rochester our attention was drawn to this appendix which was noticed by a student of ronald jones subsequently we learned from makoto yano that motoshige itoh had pointed out an important related paper by ryuotaro komiya and t shizuki 1967 whose condition 11 for the johnson case anticipated our equation 12 below we are grateful for having both of these references brought to our attention 2 gale constructs an example in which the donor is enriched along with the recipient furthermore this immediately implies that a reverse transfer will immis

bank regulation risk and return evidence from the credit and sovereign debt crises in this paper we analyze whether regulation reduced risk during the credit crisis and the sovereign debt crisis for a cross section of global banks in this regard we examine distance to default laeven and levine 2008 systemic risk acharya et al 2010 idiosyncratic risk and systematic risk we employ world bank survey data on regulations to test our conjectures we find that regulatory restrictions official supervisory power capital stringency along with private monitoring can explain bank risk in both crises additionally we find that deposit insurance schemes enhance moral hazard as this encouraged banks to take on more risk and perform poorly during the sovereign debt crisis finally official supervision and private monitoring explains the returns during both crisis periods

external balances trade flows and financial conditions abstract this paper studies how changing expectations concerning future trade and financial conditions are reflected in international external positions in the absence of ponzi schemes and arbitrage opportunities the net foreign asset position of any country must as a matter of theory equal the expected present discounted value of future trade deficits discounted at the cumulated world stochastic discount factor sdf that prices all freely traded financial assets i study the forecasting implications of this theoretical link in 12 countries australia canada china france germany india italy japan south korea thailand the united states and the united kingdom between 1970 and 2011 i find that variations in the external positions of most countries reflect changing expectations about trade conditions far into the future i also find the changing forecasts for the future path of the world sdf are reflected in the dynamics of the u s external position

trends in european real exchange rates we study a newly created panel data set of relative prices for a large number of consumer goods among 31 european countries over a 15 year period the data set includes eurozone members both before and after the inception of the euro floating exchange rate countries of western europe and emerging market economies of eastern and southern europe we find that there is a substantial and continuing deviation from purchasing power parity ppp at all levels of aggregation both for traded and non traded goods even among eurozone members real exchange rates rer exhibit two clear properties in the sample a they are closely tied to gross domestic product gdp per capita relative to the european average at all levels of aggregation and for both cross country time series variation b they are highly positively correlated with variation in the relative price of non traded goods we then construct a simple two sector endowment economy model of real exchange rate determination which exhibits these two properties calibrated to match the data simulating the model using the historical relative gdp per capita for each country we find that for most countries there is a close fit between the actual and simulated real exchange rate in terms of policy relevance the model can offer suggestions of the degree to which real exchange rates in europe both in and out of the eurozone have been overvalued by approximately 15 in greece and portugal and 6 in italy and spain martin berka and michael b devereux

exchange rate regimes and current account adjustment an empirical investigation the acceleration in the formation of global imbalances in the period preceding the last financial crisis prompted a revival of the debate on whether exchange rate regimes affect the flexibility of the current account i e its degree of mean reversion as originally proposed by friedman 1953 i analyse this relation systematically using a panel of 180 countries over the 1960 2007 period i find robust evidence that flexible exchange rate arrangements deliver a faster current account adjustment among non industrial countries additionally i try to identify channels through which this effect could be taking place the results suggest that exports respond to expenditure switching behaviour by consumers when faced with changes in international relative prices configuring a potential channel

revisiting external imbalances insights from sectoral accounts abstract this paper revisits the period of substantial widening of external imbalances in advanced economies in the run up to the global financial crisis and their adjustment since then we take a granular look at these imbalances through the lens of their domestic counterpart the net financial balance of the household sector the government non financial corporations and financial corporations our findings challenge the often claimed view that the household sector lies behind most of the dynamics of the current account in fact we show that it is non financial corporations and the government that account for the bulk of i the co movement with the standard set of fundamental covariates of the current account ii the external adjustment and expenditure reduction in the aftermath of the global financial crisis and iii the diverging dynamics during large and persistent current account imbalances these results emphasize that analyzing domestic sectoral balances can lead to a better empirical and theoretical understanding of global imbalances

exogeneity tests for the chinese and u s external balance empirical evidence of the connection and the subprime crisis abstract this paper studies the global imbalances that occurred in the first years of the twenty first century the analysis encompasses the two biggest countries in the world the u s a and china many authors defend the assertion that the relationship between the current accounts of these two countries was one important cause of the subprime crisis while the u s a has increased its deficit in the last decade china has improved its surplus to investigate this relationship this study performed exogeneity tests moreover it conducted granger causality tests following the approach of toda yamamoto 1995 the results showed that there is a real causal relationship between the american and the chinese external balance furthermore the global imbalance between these two countries contributed to the subprime crisis because the tests detected structural breaks for the external balances of america and china in 2008 the dynamics of the chinese external balance changed after the subprime crisis

current account deficits during heightened risk menacing or mitigating large current account deficits and the corresponding reliance on capital flows from abroad can increase a country s vulnerability to periods of heightened risk we develop a framework to evaluate such vulnerabilities and clarify which characteristics of a country s international investment portfolio determine whether a current account deficit is menacing or mitigating financial factors namely international investment income and valuation changes on international investments are critical our framework explores how domestic and global risk shocks affect these factors an application to 10 oecd economies shows that a substantial degree of international risk sharing can occur through current accounts and international portfolios

the importance of the exchange rate regime in limiting current account imbalances in sub saharan african countries abstract one of the major current concerns of economic policy in developing countries is the choice of the appropriate exchange rate regime to consolidate and accelerate the pace of economic growth this paper aims to investigate whether the choice of a country s exchange rate regime may affect current account imbalances for sub saharan african economies to this end we first use bayesian model averaging bma supplemented by the general to specific gets method to address concerns about model uncertainty and identify the key determinants fundamentals of external balances then estimating current account imbalances over the period 1980 2012 we show that flexible exchange rate regimes are more effective in preventing such disequilibria consequently candidates for membership of monetary unions should discuss widely the possible adjustment mechanisms before forming such unions one potential measure is the sharing of external risks at the regional level

dynamics of the trade balance and the terms of trade the j curve the authors provide a theoretical interpretation of two features of international data the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements they document the same properties in a two country stochastic growth model in which trade fluctuations reflect in large part the dynamics of capital formation the authors find that their general equilibrium perspective is essential the relation between the trade balance and the terms of trade depends critically on the source of fluctuations copyright 1994 by american economic association

age structure and the current account we adjust current account surpluses and deficits of 57 countries in the period 2005 2009 for differences in the age structure of their populations and find that these differences can account for a significant part of the variation in the data among the large countries we find that the adjustment increases the surpluses of germany and japan while the surpluses of china singapore hong kong korea thailand indonesia and malaysia are significantly diminished

saving in the world abstract this paper presents new evidence on the behavior of saving in the world by extending previous empirical research in several dimensions after extensively surveying the relevant theoretical and empirical literature the paper reports estimates of saving determinants relying on the newly constructed and largest available database covering 165 countries over 1981 2012 the empirical specification includes determinants not considered in the literature explores differences in saving behavior nesting the 2008 10 crisis period and four different country groups searches for commonalities across key saving aggregates national private household and corporate saving rates and is subject to a robustness analysis based on different estimation techniques the results confirm in part existing research but also shed light on some ambiguous or contradictory findings and highlight the role of neglected determinants compared to the literature we find a larger number of significant determinants changes across periods and country groups and similarities across different saving aggregates

monetary policy trade offs and the correlation between nominal interest rates and real output the authors present a structural model of the u s economy that combines their price contracting specification with a term structure relationship an aggregate demand curve and a monetary policy reaction function the model matches important features of postwar data well and provides a structural explanation of the correlation between real output and the short term nominal rate of interest the authors perform a battery of monetary policy experiments that show that as viewed through the lens of this model monetary policy has struck a good balance recently among competing monetary policy objectives copyright 1995 by american economic association

monetary policy inertia reconsidered evidence from endogenous interest rate trajectory abstract by finding small forecastable variability of future policy rates by highly smoothed central bank s endogenous interest rate trajectory i suggest that market s failure to predict large portion of variability in future rates does not always imply limited policy inertia

the welfare effects of targeted export subsidies a general equilibrium approach a three country model of export subsidies is developed with an exporter an importer and a neutral country which can act on either side of the market when the neutral country is an exporter the country offering a targeted export subsidy always suffers a welfare loss however when the neutral country is an importer the possibility of a paradoxical result that the subsidizing country can gain and the subsidized country can lose is shown to exist and the conditions under which this result occurs are derived the model fails to provide justification on national welfare grounds for widespread use of targeted export subsidies such as the export enhancement program

equilibrium and optimality some imprints of david gale abstract the paper is a review of some of the themes to which david gale made lasting contributions it touches upon a number of the fundamental issues in the walrasian equilibrium theory existence uniqueness and stability the overlapping generations model non optimality and indeterminacy of competitive equilibria the von neumann equilibrium as a turnpike and in the theory of decentralized intertemporal allocation through competitive prices efficiency and golden rules duality and existence of optimal programs

international debt deleveraging i provide a framework for understanding debt deleveraging in a group of nancially integrated countries during an episode of international deleveraging world consumption demand is depressed and the world interest rate is low reecting a high propensity to save if exchange rates are allowed to oat deleveraging countries can depreciate their nominal exchange rate to increase production and mitigate the fall in consumption associated with debt reduction the key insight of the paper is that in a monetary union this channel of adjustment is shut o and therefore the falls in consumption demand and in the world interest rate are amplied hence monetary unions are especially prone to hit the zero lower bound on the nominal interest rate and enter a liquidity trap during deleveraging in a liquidity trap deleveraging gives rise to a union wide recession which is particularly severe in high debt countries the model suggests several policy interventions that mitigate the negative impact of deleveraging on output in monetary unions

domestic credit growth and international capital flows during the pre crisis period europe experienced substantial cross country variation in domestic credit growth and cross border capital flows we investigate the inter relations between domestic credit growth and international capital flows during the period 1993 2008 with a special focus on the boom period of 2003 2008 we establish that domestic credit growth in european countries is strongly related to net debt inflows but not to net equity inflows this pattern also holds for an extended sample of 54 advanced and emerging economies

foreign aid and public goods abstract most less developed countries ldcs use foreign economic aid to finance public consumption goods or public intermediate inputs this paper constructs a two country general equilibrium trade model where an income transfer that takes place between the two countries is used by the recipient to finance a public consumption good within this framework the paper identifies the conditions under which the income transfer improves or deteriorates the donor country s terms of trade and shows that the transfer can be welfare enriching for the donor and welfare immiserizing for the recipient country the paper also demonstrates that the transfer can raise reduce world welfare in which case a welfare increase decrease in both the donor and the recipient country is possible

measuring aggregate risk can we robustly identify asset price boom bust cycles abstract we investigate the extent to which it is possible to detect asset price booms and banking crises according to alternative identification strategies and we assess their robustness we find some evidence that house price booms are more likely to turn into costly recession or to trigger a banking crisis than stock price booms resorting both to a non parametric approach and a discrete choice logit model we analyze the ability of a wide set of indicators to robustly explain costly asset price booms according to our results real long term interest rates and real stock prices tend to increase the probability of a costly housing price boom whereas real gdp tends to increase the probability of a costly stock price boom interestingly the credit to gdp gap indicator sometimes put forward in the literature as a key reference for setting countercyclical capital buffers does not seem to be a robust leading indicator of costly booms or banking crises

external adjustment and the global crisis abstract the period preceding the global financial crisis was characterized by a substantial widening of current account imbalances across the world since the onset of the crisis these imbalances have contracted to a significant extent in this paper we analyze the ongoing process of external adjustment in advanced economies and emerging markets we find that countries whose pre crisis current account balances were in excess of what could be explained by standard economic fundamentals have experienced the largest contractions in their external balance we subsequently examine the contributions of real exchange rates domestic demand and domestic output to the adjustment process allowing for differences across exchange rate regimes and find that external adjustment in deficit countries was achieved primarily through demand compression rather than expenditure switching finally we show that changes in other investment flows were the main channel of financial account adjustment with official external assistance and ecb liquidity cushioning the exit of private capital flows for some countries

estimating the effect of exchange rate changes on total exports this paper shows that real effective exchange rate reer regressions the standard approach for estimating the response of aggregate exports to exchange rate changes imply biased estimates of the underlying elasticities we provide a new aggregate regression specification that is consistent with bilateral trade flows micro founded by the gravity equation

current accounts and financial flows in the euro area abstract we construct a new database of bilateral financial flows among euro area countries and their major world partners and explore the role of financial links in the accumulation and then adjustment of current account imbalances in the euro area the data show that the geography of financial flows can differ quite markedly from trade flow patterns and suggest that the nexus between surpluses in the core with deficits in the periphery went along financial rather than trade interlinkages in particular the data document the dominant role of core countries in financing the euro area periphery s current account deficits before the financial crisis both directly and through intermediating financial flows from outside of the euro area most of this financing took the form of debt instruments following the withdrawal of private financing from core countries during the crisis the ecb mediated funding and other official flows helped the periphery to refinance its liabilities and smoothen the external adjustment

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

tariffs foreign capital and national welfare with sector specific factors abstract this paper examines the effect on national welfare of an endogenously determined inflow of foreign capital in the context of a well known model with sector specific inputs both for the case of unrestricted international trade and investment and in the presence of a tariff the second best problem of the optimal tax on foreign investment for a given tariff level is also investigated by application of the concept of shadow prices for primary factors in distorted open economies the results obtained are then related to analogous propositions derived previously for the standard heckscher ohlin model

the great retrenchment international capital flows during the global financial crisis the current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization we identify the stylized facts and main drivers of this development the retrenchment in international capital flows is a highly heterogeneous phenomenon first across time being especially dramatic in the wake of the lehman brothers failure secondly across types of flows with banking flows being the hardest hit due to their sensitivity of risk perception and thirdly across regions with emerging economies experiencing a shorter lived retrenchment than developed economies our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration its specific nature with countries relying on bank flows being the hardest hit as well as domestic macroeconomic conditions and their connection to world trade flows gian maria milesi ferretti and cedric tille

sovereign default risk and state dependent twin deficits abstract this paper analyzes the impact of the government debt to gdp ratio on the correlation of the fiscal balance and the current account above a government debt to gdp ratio of 90 percent the correlation of the two balances decreases by 0 16 in a sample of 12 euro area countries and by 0 17 for greece ireland portugal and spain this paper develops a small open economy model with defaultable government debt and riskless international capital markets to explain the empirical evidence of a state dependent change in the correlation in the model high public debt to gdp ratios raise sovereign risk premia as the default probability increases leading to higher uncertainty about future taxes in this case precautionary savings of households increase and partially compensate current account deficits that result from fiscal deficits the increase in households saving reduces the correlation of the two balances by the same magnitude as documented in the data the model calibrated to greece matches further business cycle moments and the empirical default frequency

europe and global imbalances although europe in the aggregate is not a major contributor to global current account imbalances its trade and financial linkages with the rest of the world mean that it will still be affected by a shift in the current configuration of external deficits and surpluses we assess the macroeconomic impact on europe of global current account adjustment under alternative scenarios emphasizing both trade and financial channels finally we consider heterogeneous exposure across individual european economies to external adjustment shocks philip r lane and gian maria milesi ferretti

do multinationals deteriorate developing countries export prices the impact of fdi on net barter terms of trade this paper explores the economic relationship between foreign direct investment fdi to developing countries and the export prices of the latter measured by terms of trade it is rst shown that economic theory suggests such a relationship for various reasons but is inconclusive about the direction of the eect to address this open issue empirically i analyze data on more than 50 developing countries throughout the period 1980 2008 using robust dynamic panel data methods the results show that fdi had an economically relevant and statistically signicant positive impact on developing countries net barter terms of trade a higher level of education in the developing country fosters this eect

financial globalisation monetary policy spillovers and macro modelling tales from 1001 shocks abstract we hypothesise that new keynesian dsge models that do not feature powerful financial spillover channels confound the effects of domestic and foreign disturbances when confronted with the data we derive several predictions from this hypothesis and subject them to data using monetary policy shock estimates for 29 economies obtained from more than 190 structural monetary models in the literature consistent with the predictions from our hypothesis we find that monetary policy shock estimates obtained from new keynesian dsge models are in general contaminated by a common component the more so the more strongly economies are financially integrated in the data moreover we find that the common component is correlated with the actual monetary policy stance of the us and the euro area again the more so the more strongly economies are financially integrated this finding is consistent with the hypothesis that in the data federal reserve and ecb monetary policies spill over to financial conditions in small open economies through a global and regional financial cycle but that this is in general not accounted for by the new keynesian dsge models used in the literature

waves of international banking integration a tale of regional differences abstract we propose an original measure of international banking integration based on gravity equations and a spline function on a panel of 14 countries and their 186 partners between 1999 and 2012 contrary to the conventional wisdom we uncover that 1 the international banking integration outside the euro area has been tenaciously increasing since 1999 and has even strengthened after the crisis 2 in contrast the international banking integration of the euro area has been cyclical since 1999 with a peak in 2006 and a complete reversal since then 3 this decline is not a correction of previous overshooting but a marked disintegration 4 outside the euro area the level of income does not affect the shape of banking integration

the rise and fall of european current account deficits this paper traces the rise and fall of current account deficits in certain euro area countries and in the baltics these countries all entered the global financial crisis with sizable current account deficits and the unwinding of these deficits has been a complex and painful process for most while much of the general policy discussion of the large pre crisis deficits has focused on losing export competitiveness this paper highlights other results in the literature regarding import booms as well as a dimension that is rarely discussed the drop in the non trade portion of the current account transfers and net income balance in many countries the paper also examines progress made in unwinding these deficits most countries have made tangible progress but with different degrees improvement of price competitiveness and a shift of production from non tradable to tradable sectors has helped increase exports and along with compressed imports close the current account deficits the adjustment though has taken place against recessions and low growth in the euro area and the paper also considers what has made the process more painful in some countries rather than others we find that large current account balances prior to the crisis is the best predictor of a sharp drop in output during the crisis supportive macro policies to cushion the adjustment process and keep overall euro inflation at or above target level are necessary in the longer term improving institutions to deal with imbalances and preventing them at future entry are important

cross border spillovers of monetary policy what changes during a financial crisis abstract this paper analyses cross border spillovers of monetary policy by examining two countries that were in the eye of the storm during the euro area sovereign debt crisis namely ireland and portugal the research provides insight as to how banking and sovereign stress affect the inward transmission of foreign monetary policy to two economies that share many characteristics but that also have many distinct features in particular our research addresses the question of whether a banking system in distress reacts more or less to monetary policy changes in other major economies the empirical analysis indicates that international spillovers are present for us and uk monetary policy for both ireland and portugal but there is heterogeneity in the transmission mechanisms by which they affect credit growth in the two economies

fiscal rules and twin deficits the link between fiscal and external balances this paper investigates the relationship between countries fiscal balances and current accounts with an emphasis on the role of fiscal rules the direct effect of fiscal policy on the current account via aggregate import demand is potentially amplified by indirect effects materializing through interest rate effects and inter generational transfers that reduce savings on the other hand the implied positive relation between fiscal and external balances is potentially attenuated by offsetting changes in savings through ricardian equivalence considerations we expect this attenuation effect to be stronger in countries with more stringent fiscal rules and test this hypothesis using a panel of 73 countries over the period 1985 2012 as previous studies we find a positive effect of fiscal balances on the current account supporting the twin deficit hypothesis however the effect of fiscal balances on the current account depends on the stringency of fiscal budget balance or debt rules in place it is reduced by one third on average and virtually eliminated for countries with the most stringent fiscal rules authors abstract

is there an innovation effect on current account a case for european countries abstractthe aim of this article is to find out whether there is an innovation effect on the current account and if there is one then to determine its significance the study is carried out for the current accounts of european countries innovation is tested together with some other factors as control variables in order to estimate and compare its role in the determination process of the current account the results indicate that innovation has quite a significant influence on the current accounts of european countries and the form of the relationship between innovation and current account is non linear moreover the impact of innovation is stronger for countries at higher levels of innovation but the growth rate of its average marginal effect diminishes through its increasing levels

immiserizing transfers from abroad abstract this paper shows that an international transfer payment may paradoxically immiserize the recipient country or increase the donor country s welfare even when world markets are stable despite the traditional view that such a paradox theoretically requires market instability to demonstrate this paradoxical possibility the paper extends the conventional trade theoretic analysis to admit exogenous distortions created by tax cum subsidies in domestic production or endogenous distortions due to additionality requirements imposed by the donor on the recipient this analysis of immiserizing transfers from abroad immediately suggests significant implications for important policy issues including the evaluation of real benefits from foreign aid

fiscal cyclicality and emu abstract for the set of emu member countries we examine cyclical patterns in fiscal outcomes we find that there is significant time variation in fiscal cyclicality with an improvement in the wake of the maastricht treaty but a deterioration after the creation of emu furthermore we show that the fiscal cycle is affected by the financial cycle in addition to the output cycle the lessons for the current reforms of european economic and fiscal governance are manifest

current account adjustment and retained earnings abstract this paper develops a formal strategy to calculate current accounts with retained earnings re on equity investment and analyzes their adjustment during the global financial crisis re are the part of companies profits which is reinvested and not distributed to shareholders as dividends international statistical standards treat re on foreign direct investment and re on portfolio investment differently while the former enter the current and financial account the latter do not we show that this differential treatment strongly affects current accounts of several advanced economies frequently referred to as financial centers with large positions in equity portfolio investment our empirical analysis finds that the differential treatment of re alters the interpretation of current account adjustment for the global financial crisis

does the current account still matter do global current account imbalances still matter in a world of deep international financial markets where gross two way financial flows often dwarf the net flows measured in the current account contrary to a complete markets or consenting adults view of the world large current account imbalances while very possibly warranted by fundamentals and welcome can also signal elevated macroeconomic and financial stresses as was arguably the case in the mid 2000s furthermore the increasingly big valuation changes in countries net international investment positions while potentially important in risk allocation cannot be relied upon systematically to offset the changes in national wealth implied by the current account the same factors that dictate careful attention to global imbalances also imply however that data on gross international financial flows and positions are central to any assessment of financial stability risks the balance sheet mismatches of leveraged entities provide the most direct indicators of potential instability much more so than do global imbalances though the imbalances may well be a symptom that deeper financial threats are gathering

international currency exposures valuation effects and the global financial crisis abstract we examine the evolution of international currency exposures with a particular focus on the 2002 12 period during the run up to the global financial crisis there was a widespread shift towards positive net foreign currency positions such that relatively few countries exhibited the archetypal emerging market short foreign currency position on the eve of the global financial crisis during the crisis the upheaval in currency markets generated substantial currency generated valuation effects much of which were not reversed there is some evidence that the distribution of valuation effects was stabilizing in the sense of showing a negative covariation pattern with pre crisis net foreign asset positions