Asset arbitrage and the price of oil

It is commonly understood that macroeconomic shocks influence commodity prices and that one channel for this is the link between interest rates, expected future asset returns and stock-holding. In this paper the link is extended to the petroleum market with the recognition that recorded stocks of oil comprise a small share of annual demand and that the parallel with storable commodities is the decision to produce the oil in the first place, as opposed to holding it in the ground as reserve. Oil reserves are then a key asset in producing countries, which is arbitraged against financial assets. Thus, when the yield on financial assets falls, retaining oil reserves becomes more attractive to producing countries, which then have less incentive to accommodate demand rises, and so the oil price rises. This perspective on oil pricing is modeled in a dynamic multi-region general equilibrium framework in which regional households manage portfolios of assets that include oil reserves. When the model is calibrated to match observed data over two decades, simulation results indicate that asset arbitrage made a large contribution to the high pre-GFC oil price.     

Japan's economic slowdown and its global implications: a review of the economic modelling

Despite its role as a driver of global economic growth through the 1970s, in recent decades the rise of China has seen the international importance of Japan's economic performance recede from the public discourse. This is notwithstanding its continuing key role as economic partner to both industrial and developing countries and changes in its economic performance that would otherwise be a matter for global concern. In particular, the tendency for the Japanese economy and its external trade to stagnate not only has immediate consequences for global performance but also foreshadows a path to industrial transition for other key Asian economies. This paper reviews quantitative studies of Japan's performance. It identifies a paucity of results addressing global implications and suggests new research in this direction.     

Demographic Change and Policy Responses: Implications for the Global Economy

The fertility declines associated with the final phase of the global demographic transition have led to slower population growth and accelerated ageing in developed countries and in several advanced developing countries. A global demographic and economic model is used to assess the implications of these changes for population sizes, age‐gender distributions, labour force growth and their implications for economic performance. A baseline projection that incorporates declining fertility is compared with a hypothetical constant population growth scenario. The results show that slower population growth and ageing reduces average saving rates in industrial regions, yet global investment demand is also slowed and saving rates rise in developing regions, so there is no net tightening of financial markets. Increased aged labour force participation, considered one solution to the resulting rise in aged dependency in advanced regions, is found to redistribute investment in favour of the industrialised regions and hence to accelerate their per capita income growth, while conferring on the other regions compensatory terms of trade improvements. The alternative of replacement migration is found to require inconceivably large population movements. It also impairs real per capita growth in destination regions but by least in Western Europe, where the terms of trade are improved by the immigration.     

MORE ON WELFARE GAINS TO DEVELOPING COUNTRIES FROM LIBERALIZING WORLD FOOD TRADE

The common presumption that food-importing developing countries would be harmed by a liberalization of world food trade is questioned in this paper. Both theory and new empirical modelling evidence suggest the possibility of the opposite conclusion. Even if just advanced industrial countries were to liberalize their food trade, the present empirical analysis (using a model of world food markets) suggests that economic welfare and net foreign exchange earnings from food trade could improve for the vast majority of developing countries. The extent to which that gain would be greater if developing countries also were to liberalize their policies affecting food markets is shown as well. The analysis helps to reconcile differences between previous results using partial-equilibrium models and those derived from computable general equilibrium models.     

LIBERALISING OECD AGRICULTURAL POLICIES IN THE URUGUAY ROUND: EFFECTS ON TRADE AND WELFARE

A dynamic, stochastic, multi-commodity model of world food markets is used to estimate the effects of liberalising agricultural policies in industrial countries. The effects on international and domestic prices, on trade volumes and on economic welfare of a phased liberalisation of industrial-country policies between 1988 and 1992 are compared with the effects of a similar hypothetical liberalisation in the early 1980s. The results suggest that, because of the dramatic increase in agricultural protection during the 1980s, the effects of a liberalisation under the Uruguay Round would be, in real terms, more than double those that would have resulted from a similar liberalisation a decade earlier. Major gainers are consumers in Western Europe and Japan and farmers in developing countries. But the cost to tax-payers in Western Europe is also escalating, not to mention the burden on non-agricultural producers in those countries whose competitiveness is reduced by farm policies. These domestic pressures from treasuries and from producers of non-farm products, together with greater international pressure for reform from agricultural-exporting countries, have raised the probability of at least some liberalisation during the Uruguay Round of multilateral trade negotiations.     

CHINA'S EQUILIBRIUM REAL EXCHANGE RATE: A COUNTERFACTUAL ANALYSIS

Abstract.  China's 'equilibrium' real effective exchange rate is explored using an adaptation of the Devarajan-Lewis-Robinson three-good general equilibrium model under a variety of assumptions about the balance of trade. The absence of secondary indices of import and export prices necessitates their construction from trade data. Some undervaluation is suggested in the lead-up to and during the financial crisis, due in part to an extraordinary accumulation of foreign reserves following exchange rate integration in 1994. If, instead, China had run a more typical trade balance prior to the crisis its real effective exchange rate would have been higher by about a tenth.     

ON THE NEGLECT OF DYNAMICS,RISK AND MARKET INSULATION IN THE ANALYSIS OF URUGUAY ROUND FOOD TRADE REFORMS*

The substantial investment in models of international food markets prior to and during the Uruguay Round of international trade negotiations has been a mixed blessing so far as the prospects for reform are concerned. At worst, results from these models have misled the negotiations because they have most often ignored a primary concern lending domestic political support to food market interventions, namely the avoidance of risks borne of dependence on international markets. In this paper the reasons for market insulating policies are reviewed and their links with protection elucidated. Some errors that have stemmed from the application of 'standard' but inappropriate models are noted. Finally, the implications of extending the standard method to include dynamic behaviour and market insulating policies are examined.     

Appreciating the Renminbi

International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with an underlying real exchange rate appreciation. This hinges on the Balassa–Samuelson hypothesis, which sees growth as stemming from improvements in traded sector productivity and associated rises in wages and non‐traded prices. Yet, despite extraordinary growth after the mid‐1990s China’s real exchange rate showed no tendency to appreciate until after 2004. We use a dynamic general equilibrium model to simulate the economy and show that, during this period, trade reforms and a rising national saving rate were offsetting forces in the presence of elastic labour supply. We then examine the possible determinants of the striking transition to real appreciation thereafter, noting mounting evidence that an improved rural term of trade has tightened China’s labour market. We show that should the Chinese government bow to international pressure by appreciating the renminbi either via an extraordinary monetary contraction or via export disincentives, the consequences would be harmful for both Chinese and global interests.