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

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 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

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

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

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

the fertility effect of dependent tax exemptions estimates for the united states the effect of the dependent tax exemption on the fertility rate in the united states is estimated the estimation is an improvement on previous work in that a non linear specification is used to better capture the shape of the demand for children it is found that the marginal effect of the dependent exemption decreases with the level of the exemption this suggests that although subsidies for childbearing will increase fertility it becomes increasingly difficult for countries to increase fertility through this type of scheme

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

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

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

an institutional theory of hydraulic fracturing policy the use of high volume horizontal hydraulic fracturing fracking has increased substantially over the past five years in the united states use of this drilling technology to extract natural gas from hitherto impermeable shale is expected to increase even more in coming decades two institutions integration contracts and well spacing requirements evolved to mitigate the common pool economic wastes associated with conventional oil and gas drilling u s regulators have applied these institutions to fracking however shale plays differ geologically from conventional plays and are subject to different extractive technologies we theorize that the point source pollution characteristics of conventional drilling allowed integration contracts and well space requirements to minimize local negative environmental externalities as an unintended byproduct of minimizing common pool economic wastes the non point source pollution characteristics of fracking however make these institutions insufficient to minimize negative environmental externalities associated with drilling in shale plays because the economic waste problem is different if policymakers understand the crucial differences between conventional oil and gas plays and shale plays and the drilling technologies applied to them they should be better equipped to craft fracking regulatory policies that internalize problematic externalities

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

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

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

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

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

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

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