The Impact of a Disorderly Resolution of Global Imbalances on Global Wealth

Partly reflecting structural advantages such as liquidity and strong investor protection, foreigners have built up extremely large positions in US (as well as other dollar‐denominated) financial assets. This paper describes the impact on global wealth of an unanticipated shock to US financial markets. For every 10 per cent decline in the dollar, US equity markets, and US bond markets, total wealth losses to foreigners could amount to about 5 percentage points of foreign GDP. Four stylized facts emerge: (i) foreign countries, particularly emerging markets, are more exposed to US bonds than to US equities; (ii) over time US exposure has increased for most countries; (iii) on average, US asset holdings of developed countries and emerging markets (scaled by GDP) are very similar; and (iv) based on their reserves position alone, wealth losses of emerging market governments could on average amount to about 2¾ percentage points of their GDP.     

Taxation, agency conflicts, and the choice between callable and convertible debt

We analyze debt choice in light of taxes and moral hazard. The model features an infinite sequence of nonzero-sum stochastic differential games between equity and debt. Closed-form expressions are derived for all contingent-claims. If equity can increase volatility without reducing asset drift, callable bonds with call premia are optimal. Although callable bonds induce risk shifting, call premia precommit equity to less frequent restructuring and are tax-advantaged. Convertible bonds mitigate risk shifting, but only induce hedging if assets are far from the default threshold. Convertibles are optimal only if risk shifting reduces asset drift sufficiently.     

Uncertainty in the public debt market and stochastic long-run growth

In a continuous time model, a representative household has to allocate its investment and consumption in an optimal manner under conditions of uncertainty. In the present study it is hypothesized that there are two types of assets: a risk-free and a risky asset. The risk-free asset is assumed to be the physical capital, while at the same time uncertainty is allowed to result from the exogenous random variations in the public debt market, rendering in this way government bonds to act as the risky asset. In the endogenous growth framework with productive public investment, the expected long-run growth rate, the dynamic path of consumption as well as the optimal allocation of investment between a risky and a riskless asset, are analytically derived. This kind of treatment allows us to create a locus for the long-run growth over the various levels of uncertainty. The outcome of the analysis is that a rise in uncertainty impacts negatively upon the long-run growth rate. In order to empirically assess the relationship between growth and uncertainty, we lay our emphasis on the US economy for the period 1957:1 to 2008:4. Within the framework of a bivariate BEKK–GARCH(1,1)-M model a significant negative relationship between uncertainty and economic growth has been established.     

Information and capital flows: The determinants of transactions in financial assets

We show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions. Our results support the hypothesis that informational asymmetries are responsible for the strong negative relationship between asset trade and distance. This result is very important for theories of asset trade, portfolio adjustments and home bias. We strengthen it by investigating the roles of explicit informational variables, as well as distance, in explaining separately cross-border trade in corporate equities, corporate bonds, and government bonds.     

Quantitative easing and asset bubbles

Expansionary monetary policy is necessary to respond to financial crises. However, if Central Bank asset purchase initiatives are too large or last too long, they can lead to explosive increases in asset prices which add to the risk of a future crisis. This article employs two models including the Campbell–Shiller and Generalized Supremum Augmented Dickey Fuller techniques to search for bubbles in the US equity, housing and bond markets over the past eight years. Although, we find that prices in equities and housing have risen following Federal Reserve intervention, there is little indication of asset price bubbles. There is evidence of explosive bond price increases from September of 2011 to February of 2013.     

China's Growing Government Debt in a Computable Overlapping Generations Model

This paper simulates the effects of China's growing government debt in a computable equilibrium model of overlapping generations. Our model assumes that the government increases debt to finance its spending in the short run, and then increases taxes or cuts spending to keep the debt–GDP ratio constant. The spending‐driven government debt increases public capital and output in the short run, but decreases private investment, total capital stock, output, and net exports in the long run, and makes the future generations worse off. Among various means of debt control, a decrease in government spending seems to be the least harmful to private investment, capital stock, and output while an increase in capital taxation is most detrimental.     

Composition of International Assets and the Long‐run Current Account

We document the role of capital gains and losses for the current account that a country can sustain along a balanced growth path. While it is well know that growth allows a country to run a current account deficit and still keep its external debt stable as a share of GDP, the sensitivity of the current account to the composition of external assets and liabilities has received little attention. We show that this composition matters because several assets, such as equity or FDI, earn substantial capital gains that are not reflected in the current account. A country that is a net creditor in such assets can then sustain a larger current account deficit. Using a broad sample, we show that this aspect substantially tilts estimates of the long‐run current account towards a deficit among industrialized economies, with the opposite situation for emerging markets. We also show that industrialized economies are likely to benefit from predictable capital gains in the future.     

Exchange Rates and Long‐Term Bonds*

There is tentative evidence to suggest that the well‐documented empirical failure of uncovered interest parity (UIP) is confined to short‐term interest rates. However, tests of UIP for long‐term bonds are thwarted by various data problems. These data problems can be avoided by focusing on short investments in long‐term bonds. This paper concerns the relationship between changes in the US dollar–Deutsche Mark exchange rate and returns to short investments in US and German long‐term government bonds. The hypothesis that expected returns to investments in bonds denominated in the two currencies are equal is not rejected, and the estimated slope coefficients are positive. For corresponding short‐term interest rates, the typical finding of negative and large Fama coefficients is confirmed. We conclude that it is the maturity of the asset, rather than the investment horizon, that matters for the results.     

Portfolio Composition and Valuation Effects in Emerging Market Economies*

ABSTRACT

The increase in cross-border assets and liabilities of nations with globalization, implies small asset price and currency movements create large wealth changes. The national net external position is increasingly driven by valuation effects, which the current account does not capture. We analyze valuation effects for a group of seven emerging economies, namely Brazil, Colombia, India, Republic of Korea, Mexico, Peru and Turkey for the time period 2005:Q1-2015:Q4 by scrutinizing their external asset portfolio while controlling for country fundamentals. Both asset and liability categories of Direct Investment equity are found to positively impact valuation. Equity liabilities and debt assets of Portfolio Investment positively influence valuation. Debt liabilities of all kinds of investment negatively impact valuation. Countries with stronger currency tend to gain through valuation effects. An appreciated real effective exchange rate is associated with higher valuation gains. We also found non-linear effects of the composition of external debt portfolio by interacting external portfolio and country characteristics. The external portfolio selection of emerging economies (with more in Direct Investment equity liabilities and Portfolio Investment debt assets) in the period has shielded them from global volatility, and enabled valuation gains.     

Capital flight from sub‐Saharan Africa: linkages with external borrowing and policy options

Even as African countries became increasingly indebted, they experienced large‐scale capital flight. Some of this was legitimately acquired capital fleeing economic and political uncertainties; some was illegitimately acquired wealth spirited to safer havens abroad. This paper presents new estimates of the magnitude and timing of capital flight from 33 sub‐Saharan African countries from 1970 to 2004. We then analyze its determinants, including linkages to external borrowing. Our results confirm that sub‐Saharan Africa is a net creditor to the rest of the world, in that the subcontinent’s private external assets exceed its public external liabilities: total capital flight amounted to $443 billion (in 2004 dollars), compared to the external debt of $195 billion. Econometric analysis indicates that for every dollar in external loans to Africa in this period, roughly 60 cents flowed back out as capital flight in the same year, a finding that suggests the existence of widespread debt‐fueled capital flight. The results also show a debt‐overhang effect, as increases in the debt stock spur additional capital flight in later years. In addition to policies for recovery of looted wealth and repatriation of externally held assets, we discuss the need for policies to differentiate between legitimate and odious debts, both to ease current burdens on African countries and to improve international financial governance in the future.     

Economic Growth,Public Debt and Welfare: Comparing Three Budgetary Rules

Abstract. We present an endogenous growth model with externalities of capital and elastic labor supply where we allow for public debt and welfare‐enhancing public spending. We analyze different debt policies as regards convergence to a balanced growth path and their effects on long‐run growth and welfare. Three budgetary rules are considered: the balanced budget rule, a budgetary rule where debt grows in the long run but at a rate lower than the balanced growth rate and a rule where public debt grows at the same rate as all other economic variables but where it guarantees that the intertemporal budget constraint is fulfilled.     

金融资产与实物资产对城镇居民消费影响的差异性研究

本文在相关资料基础上,对我国城镇居民持有金融资产与实物资产进行了重新核算,并采用ARDL-UECM模型计量分析了长短期内金融资产、实物资产对消费影响的差异性。结果表明:金融资产长期内对消费支出存在较弱的抑制作用,短期内存在较弱的促进作用;而实物资产长期内对消费存在有限的促进作用,短期内对消费存在较强的促进作用。产生这种差异的原因主要是:超额比重预防性储蓄导致金融资产对居民消费产生长期扭曲,以及过高自有住房率在房价攀升时只能提高短期边际消费倾向,长期则有限。现阶段只有降低超额比重预防性储蓄及抑制过高的房价才能进一步提高城镇居民的资产财富效应。     

Sharecroppers or Shrewd Capitalists? Projections of the US Current Account,International Income Flows,and Net International Debt

This paper presents a detailed framework and analysis to address whether the US is on track to becoming a society of “sharecroppers,” paying a large and growing share of income to foreign owners of US assets, or rather is more likely to continue as a society of “shrewd capitalists” with the cost of servicing international debt remaining relatively low and manageable despite growing international debt. Various scenarios illustrate the reliability of the modeling framework and show how alternative future paths for key variables affect the outcomes. The relationships determining the international flows and relative debt levels—including relative rates of return, asset portfolio compositions, valuation effects, and the outlook for an improving US trade position—indicate that a manageable and sustainable outlook is more likely than often considered to be the case. Results also show, however, the extent to which the outlook is vulnerable to the loss of “exorbitant privilege.”     

The Effects of Macroeconomic Policies in a Mercantilist Economy

By introducing money and foreign exchange in the Zou (1997) model of mercantilism, the paper shows the effects of macroeconomic policies in mercantilist economies. It is shown that in the long run, consumption and foreign asset accumulation increases as a result of stronger mercantilist sentiments, permanent increases in the consumption tax, increases in the monetary growth rate and purchases of foreign bonds. In the short run, however, macroeconomic disturbances including the mercantilist sentiments, the monetary growth rate, and the consumption tax have negative effects on current consumption and positive effects on current foreign asset accumulation, while purchasing foreign bonds has positive effects on both current consumption and current foreign asset accumulation. The theoretical explorations may provide a theoretical structure for hoarding international reserves and export-led growth strategy utilized by emerging market economies.     

Interdependence and Contagion in Global Asset Markets

We assess interdependence and contagion across three asset classes (bonds, stocks, and currencies) for over 60 economies over the period 1998–2011. Using a global VAR, we test for changes in the transmission mechanism—both within and cross‐market changes—during periods of global financial turbulence. Contagion effects within‐market are notable in Latin American and Emerging Asian equities. In addition, in times of financial crisis, we find that US equity shocks lead to risk aversion by investors in equities and currencies globally and in some emerging market bonds. Euro area shocks are significant mainly within the bond market.     

Stock markets and the exchange rate: A multi-country approach

A general model of optimal choice over risky assets is used to derive an estimable exchange rate equation which is then applied to the German mark-U.S. dollar and Japanese yen-U.S. dollar exchange rates. Previous models which exclude equities find that government bond and/or money stocks have a weak effect on exchange rates, a result that is also found here. By contrast, equity values are shown to have a significant effect on the value of the German mark-U.S. dollar and Japanese yen U.S. dollar exchange rates over the period 1974 to 1988.     

量化宽松、财政赤字与美元资产安全

次贷危机爆发以来,美国采取了一系列货币和财政政策以拯救深陷泥潭的本国经济。美联储运用非常规政策工具向金融体系注入大量流动性资产,美联邦政府也大幅度提高了财政支出,使得财政赤字愈加恶化。在此背景下,美元资产的安全性成为投资者关注的焦点。本文分别从货币政策效果、财政赤字的可持续性以及投资主体等方面考察了美元资产的安全性,分析了美国宏观经济政策的实际作用,并从投资主体结构探讨了美国联邦政府的经济取向,最后以所涉及资产的市场表现回应美元资产安全问题。笔者认为,与其它货币资产相比,持有美元资产并不会承担额外的币种风险。     

Do China and oil exporters influence major currency configurations?

This paper analyses the impact of the shift away from a US dollar focus of systemically important emerging market economies (EMEs) on configurations between the US dollar, the euro and the yen. Given the difficulty that fixed or managed US dollar exchange rate regimes remain pervasive and reserve compositions mostly kept secret, the identification strategy of the paper is to analyse the market impact on major currency pairs of official statements made by EME policy-makers about their exchange rate regime and reserve composition. Developing a novel database for 18 EMEs, we find that such statements not only have a statistically but also an economically significant impact on the euro, and to a lesser extent the yen against the US dollar. The findings suggest that communication hinting at a weakening of EMEs’ US dollar focus contributed substantially to the appreciation of the euro against the US dollar in recent years. Interestingly, EME policy-makers appear to have become more cautious in their communication more recently. Overall, the results underscore the growing systemic importance of EMEs for global exchange rate configurations.     

COMOVEMENTS OF DIFFERENT ASSET CLASSES DURING MARKET STRESS

This paper measures US financial asset class linkages (stocks, bonds, T‐bills and gold) during crisis periods. We use extreme value analysis to assess the bivariate exposure of one asset class to extreme movements in the other asset classes. These bivariate co‐crash probabilities can be interpreted as a measure of financial contagion. Statistical testing reveals that bivariate extreme linkage estimates exhibit time variation for certain asset pairs, possibly caused by exogenous factors like oil shocks or shifts in monetary policy. Our results have potentially important implications for long‐run strategic asset allocation and pension fund management.     

The world's greatest debtor nation?

The widely repeated assertion that the United States has become “the world's greatest debtor nation” is based on reports of its “net international investment position.” This position relates not exclusively to debt but rather to the difference between net United States claims to foreign assets and net foreign claims to United States assets. Major portions are equities and direct investment, the latter valued at “book” or original cost.Estimates of the current value of direct investment, either market value on the basis of share prices or replacement cost, effect huge asymmetric adjustments. As United States direct investment abroad is generally much older, it has appreciated much more than foreign direct investment in the United States. With adjustments as well for the market value of gold and for bad debts, it is estimated that the United States net international investment position was more or less in balance at the end of 1987 and in only relatively small deficit at the end of 1988.