Valuation effects with transitory and trend productivity shocks

Changes in asset prices of a country's foreign assets and liabilities (“valuation effects”) are commonly thought of as stabilizing: they counteract current account movements and mitigate the impact of the current account on the country's net foreign asset (NFA) position. This paper shows that whether valuation effects are stabilizing or not depends critically on the nature of the underlying productivity shocks. In response to transitory shocks, valuation effects are stabilizing; but in response to trend shocks, such effects amplify the impact of the current account on NFA position. These contrasting effects arise because optimally smoothing consumers respond differently to a transitory shock than to a trend shock to income. This theoretical result finds empirical support with G7 countries' data, and is illustrated by the pattern of external imbalances between the U.S. and other G7 countries since the 1990s.     

Risk,external adjustment and capital flows

This paper studies the process of external adjustment. I develop an open economy model with endowment and preference shocks that can account for the empirical behavior of real exchange rates, interest rates and consumption in the U.S. and Europe. The model includes cross border holdings of bonds and equity, and financial frictions that impede international risk-sharing. I find that external adjustment following endowment shocks predominantly takes place via trade flows, consistent with the intertemporal approach to the current account. In contrast, preference shocks that change investors' risk aversion induce adjustment via the trade and valuation channels; where the latter includes the effects of unexpected capital gains and loss on existing cross border holdings and changes in the expected future return differentials between foreign assets and liabilities. The model estimates imply that the valuation channel of external adjustment is more important for the U.S. than the trade channel. Consistent with this implication, I show that forecasts of future return differentials contributed most to the volatility of the U.S. net foreign asset position in the post Bretton-Woods era.     

Getting beyond carry trade: What makes a safe haven currency?

The main objective of this paper is to investigate the fundamentals of safe haven currencies, which are those currencies that provide an hedge for a reference portfolio of risky assets, conditional on shocks to global risk aversion. We analyse a large panel of 52 currencies in advanced and emerging countries over almost 25 years of data. We find that only a few factors are robustly associated to a safe haven status, most notably the net foreign asset position, an indicator of external vulnerability, and whether currencies have been a good hedge in the past. In addition, the currencies of large, less financially open economies are a good hedge against global risk aversion shocks. By contrast, the level of the interest rate spread vs. the US is significant only during the latest crisis. Finally, we find some evidence of non-linearity as the importance of the fundamentals is stronger during crisis times.     

Dynamic stability of portfolio balance models of the exchange rate

The conditions for stability of a portfolio balance model of exchange rate determination with an endogenous current account are examined for various expectational assumptions. It is shown that unless strongly stabilizing expectational assumptions are made, if the economy is a net debtor in foreign currency assets there is the possibility that its exchange rate will exhibit instability.     

The La Marca model revisited: Structuralist goodwin cycles with evolutionary supply side and balance of payments constraints

This research is aimed at investigating the causes of volatility that affect middle‐income countries by studying the La Marca model. Drawing from the open‐economy Goodwin tradition, this model demonstrates that economic activity, income distribution and accumulation of foreign assets dynamically interact, resulting in a pattern of dampened cycles. The study consists in analyzing the characteristics of the model by initially imposing: (I) a constant real exchange rate; (II) a constant net external asset to capital ratio, which is in line with the balance of payments dominance theory and (III) a fixed income distribution. We then (IV) expand the original model by adding an evolutionary supply‐side in which productivity is at the center of the economic dynamic through international technology transfer and the Kaldor‐Verdoorn effect. The results show that (1) the model always converges. (2) The restrictions (I) and (II) remove the cyclical component of the model, which highlights a central difference between La Marca and the original Goodwin model. (3) Fixed income distribution leads to a monotonic trajectory that reduces oscillations. (4) The inclusion of productivity dynamics generates new sources of volatility in the relationship between productivity, capacity utilization and net external assets and is in line with the structuralist argument of structural fragility.     

Patience, persistence, and welfare costs of incomplete markets in open economies

We investigate the welfare implications of alternative financial market structures in a two-country endowment economy model. We obtain an analytic expression for the expected lifetime utility of the representative household when sovereign bonds are the only internationally traded asset, and we compare this welfare level with that obtained under complete asset markets. The welfare cost of incomplete markets is negligible if agents are very patient and shocks are not very persistent, but this cost is dramatically larger if agents are relatively impatient and shocks are highly persistent. For realistic cases in which agents are very patient and shocks are highly persistent, the welfare cost of incomplete markets is highly sensitive to the specific values of these parameters.     

When Do Long‐term Imbalances Lead to Current Account Reversals?

We extend the literature on sharp reductions in current account deficits by taking into account not only short‐term determinants, but also the deviation of net foreign assets from their long‐run equilibrium level. First, we analyse the long‐term relationship between net foreign assets and a set of explanatory variables and construct a measure of imbalances. Next, we model current account reversals by incorporating this new measure and compare the predictive power of this model with the baseline specification that does not account for long‐term imbalances. Our new model has a superior performance in and out‐of‐sample, especially when we control for the sign of imbalances. We also find that low net foreign assets do not necessarily lead to sharp reductions in current account deficits; it is rather the situation when they are below their equilibrium level that triggers reversals. Finally, we document that our new measure of net foreign asset imbalances is important only for developing countries, whereas standard models perform well for industrial economies.     

US Fiscal Policy and Asset Prices: The Role of Partisan Conflict

Fiscal policy shocks exert wide‐reaching effects, including movements in asset markets. US politics have been characterized historically by a high degree of partisan conflict. The combination of increasing polarization and divided government leads not only to significant Congressional gridlock, but also to spells of high fiscal policy uncertainty. This paper adds to the literature on the relationships between fiscal policy and asset prices in the US economy conditional on the degree of partisan conflict. We analyze whether a higher degree of partisan conflict (legislative gridlock) reduces the efficacy of the effect and response of fiscal policy on and to asset price movements, respectively. We find that partisan conflict does not significantly affect the relationships between the fiscal surplus to gross domestic product (GDP) and housing and equity returns. Rather, if important, partisan conflict affects the actual implementation of fiscal policy actions.     

AN EQUILIBRIUM GUIDE TO DESIGNING AFFINE PRICING MODELS

The paper examines equilibrium models based on Epstein–Zin preferences in a framework in which exogenous state variables follow affine jump diffusion processes. A main insight is that the equilibrium asset prices can be computed using a standard machinery of affine asset pricing theory by imposing parametric restrictions on market prices of risk, determined inside the model by preference and model parameters. An appealing characteristic of the general equilibrium setup is that the state variables have an intuitive and testable interpretation as driving the consumption and dividend dynamics. We present a detailed example where large shocks (jumps) in consumption volatility translate into negative jumps in equilibrium prices of the assets as agents demand a higher premium to compensate for higher risks. This endogenous “leverage effect,” which is purely an equilibrium outcome in the economy, leads to significant premiums for out‐of‐the‐money put options. Our model is thus able to produce an equilibrium “volatility smirk,” which realistically mimics that observed for index options.     

Home bias and high turnover: Dynamic portfolio choice with incomplete markets

Why do investors trade a lot in foreign assets and hold so little of them in their portfolios? This paper shows that both observations can arise naturally in the presence of nondiversifiable nontraded consumption risk when each country specializes in production, preferences exhibit consumption home bias, and asset markets are incomplete. Using a general equilibrium two-country, two-sector (tradable and nontradable) model of the world economy with production I show that low diversification occurs because variations in relative prices (i) increase the riskiness of foreign assets and (ii) facilitate risk-sharing across countries. Large and volatile capital flows are necessary to take advantage of international risk premia differentials that occur in response to productivity changes in the nontradable sector. I characterize the optimal portfolio holdings, the evolution of the investment opportunity set, the risk premium, and the dynamics of capital flows using a new methodology for solving dynamic general equilibrium models with incomplete markets and portfolio choice.     

External liabilities and crises

We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970–2011, we find that the ratio of net foreign liabilities to GDP is a significant crisis predictor. This is primarily due to the net position in debt instruments—the effect of net equity liabilities is weaker and net FDI liabilities seem, if anything, an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor; iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; and iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises sensu stricto.     

Accounting for sources of risk in international portfolio diversification

The objective of this paper is to develop an analytical method of disentangling the distinct components of the risk to a U.S. investor of his holdings of foriegn assets. The paper will identify the specific mechanism by which the insular risk of the foreign asset combines with the exchange-rate risk to determine the riskiness of the net return expressed in dollars. It is shown that the usual accounting method of estimating the net return to be expected leads to a biased estimate of that parameter. The paper suggests practical applications of the analytical results in the context of portfolio optimization.     

The demand for safe assets in emerging economies and global imbalances: New empirical evidence

Recent economic theory has singled out mismatches between the supply and the demand of safe financial assets in emerging countries as drivers of international capital flows and, ultimately, global current account imbalances. This paper assesses empirically the contribution of such “search for safe assets” to the size and composition of emerging economies’ international asset portfolios. Excess demand for safe assets in financially less‐developed countries would imply that these countries hold disproportionately high shares of their total portfolios in foreign assets. Moreover, financially less‐developed countries would hold disproportionately high shares of their foreign portfolios in financially developed countries, which are the major producers of ostensibly safe assets. This paper finds little empirical support for these predictions. Financially less‐developed countries allocate a larger proportion of their total holdings to domestic assets. Even when focusing on their foreign portfolios, there is no evidence of a general bias towards the assets of financially developed countries. Overall, asset mismatches do not appear to explain the asset allocation of financially less‐developed countries.     

Quantitative implications of a debt-deflation theory of Sudden Stops and asset prices

This paper shows that the quantitative predictions of an equilibrium asset-pricing model with financial frictions are consistent with key features of the Sudden Stop phenomenon. Foreign traders incur costs in trading assets with domestic agents, and a collateral constraint limits external debt to a fraction of the market value of domestic equity holdings. When this constraint does not bind, standard productivity shocks cause typical real-business-cycle effects. When it binds, the same shocks cause strikingly different effects depending on the leverage ratio and asset market liquidity. With high leverage and a liquid market, the shocks force “fire sales” of assets and Fisher's debt-deflation mechanism amplifies the responses of asset prices, consumption and the current account. Precautionary saving makes these Sudden Stops infrequent in the long run.     

Explaining the Appreciation of the Brazilian Real

This article seeks to identify factors explaining the appreciation of the Brazilian real observed since 2003, which was temporarily interrupted only during episodes of financial turbulence. Net foreign assets and the productivity differential relative to Brazil's main trade partners are found to be significant determinants of the real effective exchange rate in the long run. In the short term, exchange-rate developments are mostly explained by movements in net foreign assets. The production of oil is also found to explain developments in the real effective exchange rate in the long run. These results are robust to a wide range of tests. There is evidence of an overvaluation of the real in 2010, but the extent of the misalignment is hard to gauge. Fundamental Equilibrium Exchange Rate estimations point to an overvaluation between 3%–10% in 2010. Dynamic simulations of behavioral exchange-rate equations generally suggest an overvaluation of between 10%–20%. However, these estimations remain subject to large uncertainties.     

逆周期资本账户管制对宏观经济稳定与社会福利改善的作用

资本管制能否有效抵御外部冲击实现宏观经济稳定存在争论,本文通过构造开放经济的DSGE模型研究投资限制和逆周期金融交易税等资本管制工具对于实现宏观经济稳定和改善社会福利的作用。通过比较不同政策安排下主要宏观经济变量的波动性和脉冲响应函数可以发现,采用逆周期金融交易税作为资本管制工具在抵御外部冲击、维持宏观经济稳定方面具有比较优势。设置投资限制的资本管制促进了货币政策的独立性,可以使货币政策专注管理国内的经济增长和通货膨胀问题。通过不同政策安排下的福利分析可知,增加投资国外资产的限制对社会福利的增进起到负面作用,增加逆周期金融交易税的资本管制却可以减轻由投资限制导致的资源配置扭曲,从而放松投资国外资产的限制从根本上提高社会福利。所以,在资本管制工具的选择上,采取逆周期金融交易税可能比采用投资限制更优。随着资本账户开放的基本条件不断成熟,用金融交易税取代投资限制更符合浮动汇率制和自由兑换的资本账户的需求。     

Cross-border banking,credit access,and the financial crisis

We study the sensitivity of credit supply to bank financial conditions in 16 emerging European countries before and during the financial crisis. We use survey data on 10,701 applicant and non-applicant firms that enable us to disentangle effects driven by positive and negative shocks to the banking system from demand shocks that may vary across lenders. We find strong evidence that firms' access to credit was affected by changes in the financial conditions of their banks. During the crisis firms were more credit constrained if they were dealing with banks that experienced a decline in equity and Tier 1 capital, as well as losses on financial assets. We also find that access to credit reflects the balance sheet conditions of foreign parent banks. The effect of positive and negative shocks to a bank is greater for riskier firms and firms with fewer tangible assets.     

Asset Policies During an Oil Windfall: Some Simple Analytics

Many developing countries are currently experiencing oil windfalls, whether due to discoveries or to price effects. Such windfalls pose a series of policy dilemmas. The literature has focused on one of these: the choice between using windfall savings for public capital formation and investment in foreign assets. There are good theoretical reasons for investing a substantial part of the windfall initially abroad: the return to investment would fall below the world interest rate if the windfall were to be used entirely for domestic investment. Investing abroad offers an escape from diminishing returns: foreign assets can be repatriated gradually and used for domestic investment. However, in practice the efficient balance between domestic and foreign assets is politically difficult to sustain. Also, even if politically feasible this strategy is inefficient due to the failure to expand the private capital stock (‘equipment’). The policy problem is that the government cannot undertake such investment itself and trying to induce private agents to undertake equipment investment by transferring part of the windfall to them is likely to fail as a result of information problems. We argue that domestic debt repayment solves this dilemma. It has the added advantage of making foreign asset accumulation difficult to reverse.     

OPTIMAL INTERNATIONAL DEBT AND ENDOGENOUS TIME PREFERENCE IN A DEMOGRAPHICALLY DIVIDED WORLD (*)

The international transmission of shocks in population growth and technology is examined in an interdependent two-country world economy; decisions concerning the intertemporal allocation are made by social planners with an infinite horizon and an endogenous rate of time preference. Steady state shocks in population growth are shown to be negatively transmitted to the rate of time preference. In the steady state, the optimal foreign debt is determinate and it brings about a convergence of time preference. The net creditor and debtor positions in the steady state depend on the discount rate functions, the states of technology and the rates of population growth.     

关于加强非国有资产评估立法的思考

我国有关资产评估的立法,主要是围绕国有资产评估展开的。当前,国家加大了对私有财产的保护力度,非国有经济在社会经济运行中的地位越来越重要,非国有资产评估已构成评估工作的重要内容。文章提出,在这种情况下,必须打破所有制界限,建立全社会统一的资产评估立法体系,包括信息披露、复评估、民事赔偿责任等一系列规范非国有资产评估的法律制度,才能顺应市场经济发展的要求,加强国家对非国有资产评估的监管力度,保证资产评估业的健康发展。