Session 6. Global Imbalances. Gowth. v, and the Real Inteest Rate v Global Imbalances v Gowth v Intoduction to exchange ates and : The Wold Economy The eal inteest ate is the pice that equilibates saving and investment. Deceases in o inceases in dive up the inteest ate. Equilibium ate, 1
and in a Small Open Economy Counties with excess saving (elative to investment) un cuent account supluses. Remembe that when S > I, it means that spending (C + I +G) is smalle than income (GDP+NFP). CA suplus Wold ate, and in a Small Open Economy Counties with excess investment (elative to saving) un cuent account deficits. Remembe that when S < I, it means that spending (C + I +G) is geate than income (GDP+NFP). Wold ate CA deficit, 2
and : The Wold Economy CA suplus Wold ate CA deficit,, Glut To be moe specific, I will ague that ove the past decade a combination of divese foces has ceated a significant incease in the global supply of saving--a global saving glut--which helps to explain the elatively low level of long-tem eal inteest ates in the wold today Ben Benanke, Mach 10, 2005. 3
Glut Glut: The Wold Economy (1990s) (2000s) ate (1990s) ate (2000s), 4
Glut: Global Imbalances ate (1990s) CA suplus (New) ate (2000s) CA deficit,, Global Imbalances 5
Global Imbalances Cuent Account as % of Wold GDP 3 2 1 0-1 -2-3 Income - Spending 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 US OIL DEU+JPN Euope Deficit CHN+EMA Othes Euope Deficit: Bulgaia, Geece, Hungay, Ieland, Potugal, Spain, United Kingdom, How expensive is boowing fo the US? As the Net Foeign Asset Position of the US becomes negative, one would have expected that the inteest payments also became negative (and lage). But they emained positive because foeignes wee getting much lowe etuns on thei US assets than Ameicans on thei foeign assets. Income vs. NFA position as % of GDP 14% 2. Despite this incease in debt, the US still collects a highe evenue fom its assets than what it pays fo its liabilities. Income is still positive (ight scale). 1% 4% 1976 1981 1986 1991 1996 2001 2006-6% 0% -16% 1. The US has been accumulating an inceasing amount of debt (Net Foeign Asset Position on left scale) -1% -26% -2% 6
Application: Faewell to Cheap Capital? Going fowad we might see inceases in investment in emeging counties, possibly combined with inceases in consumption in China (lowe saving). Among advanced economies we see a tend towads deleveaging (highe saving), but looking beyond the next 5 yeas we will see an inceasing numbe of wokes eaching etiement and using thei savings to fund thei consumption. What will wold (eal) inteest ates do? Equilibium ate, Application: Faewell to Cheap Capital? 7
Application: Faewell to Cheap Capital? Summay on Economic Gowth: The Fou I s Innovation Initial conditions Institutions The incentives to innovate (e.g. espect of intellectual popety ights) will shift the technology fontie. This is the main foce behind gowth in the developed counties. Povides the potential fo catching up. Poo counties can gow faste when they set on a convegence path to the ich economies A key ingedient in the pocess of convegence is the building up of the capital stock. This equies high investment ates. Miacles ae counties with investment of ove 25% of GDP. In addition to physical investment, it is impotant to invest in human capital, efficiency, technology What dives investment: stability, institutions. The best way to ensue sound macoeconomic policies (i.e. stability) and political stability is to build institutions that ceate incentives fo stability: Independent cental bank, checks and balances, ule of law, tanspaency. US, Japan, Fance, Gemany China today, Singapoe in 80s High gowth (Koea) 35%; Steady state (US, Gemany) ~ 18% Thee is not a single county that has become ich with pooquality institutions 8
Economic Gowth: The 4 I s Feb 25, 2008 Medvedev outlined his efom pioities as the "fou I s": "Institutions, Infastuctue, Innovation, and." Regading institutions, Medvedev poposed to educe the numbe of govenment employees, to tansfe tasks fom the state to the pivate secto, and to combat couption. He also stessed the need to lowe the tax buden on businesses as pat of his Innovation and goals. 2 Oil Poducing Counties Institutions Matte Noway 1.5 Chile Poland Singapoe 1 India USA Institutional Quality 0.5 0-0.5-1 Libeia Nige Indonesia Namibia Bazil Geece UAE Saudi Aabia Russia China -1.5 Venezuela -2 250 680 1847 5021 13650 37103 GDP Pe Capita (2010) Souce: Fatás and Mihov (HBR 2009) 9
Assignment GDP pe capita (USD) South Afica Singapoe New Zealand Mexico Lebanon Japan India Geece Fance Egypt China Canada Bulgaia Bazil Austalia 10565 7280 14564 9133 14069 9228 3425 1410 6180 2698 7599 4428 13931 6333 11210 10710 57932 41120 29535 29352 33733 42831 28408 26607 34123 39448 39050 46212 38160 50748 PPP Cuent US$ 2010 0 10000 20000 30000 40000 50000 60000 70000 Assignment 2010 South Afica Singapoe New Zealand Mexico Lebanon Japan India Geece Fance Egypt China Canada Bulgaia Bazil Austalia (I) as % of GDP 18 20 19 20 21 17 19 19 22 23 0 10 20 30 40 50 25 28 29 32 45 10
Assignment Real GDP pe capita. PPP. (% of US) 100 90 80 70 60 50 40 30 20 Austalia Bazil Bulgaia Canada China Egypt Fance Geece 10 0 1980 1984 1988 1992 1996 2000 2004 2008 Assignment Real GDP pe capita. PPP. (% of US) 140 120 100 80 60 40 20 India Japan Lebanon Mexico New Zealand Singapoe South Afica 0 1980 1984 1988 1992 1996 2000 2004 2008 11
Assignment Gowth GDP pe capita (%). 1980-2009 9 8 7 6 5 4 3 2 1 Bazil and Gowth Singapoe Bulgaia South Afica Austalia Lebanon 0 10 15 20 25 30 35 40 45 50 India in physical capital (% of GDP). 2009. China County Ease of Doing Business Ranking (1) (2) (3) (4) (5) (6) (7) (8) (9) Singapoe 1 4 2 15 6 2 4 1 13 2 New Zealand 3 1 5 3 2 1 26 28 9 16 Canada 13 3 29 37 32 5 10 41 58 3 Austalia 15 2 63 35 6 59 48 29 16 12 Japan 20 98 44 59 15 16 112 24 19 1 Fance 29 21 19 142 46 74 55 26 7 44 South Afica 35 75 52 91 2 10 24 149 85 74 Mexico 53 67 22 105 46 44 107 58 81 23 Bulgaia 59 43 119 62 6 44 85 108 87 83 China 91 151 181 38 65 93 114 50 15 68 Egypt 110 18 154 93 72 74 136 21 143 131 Geece 100 149 51 153 89 154 74 84 88 49 Lebanon 104 103 142 111 89 93 36 95 122 122 Bazil 126 128 112 122 89 74 152 114 98 132 India 132 165 177 94 32 44 164 100 182 134 (1) Stating a Business (6) Paying Taxes (2) Dealing with Constuction Pemits (7) Tading Acoss Bodes (3) Registeing Popety (8) Enfocing Contacts (4) Getting Cedit (9) Closing a Business (5) Potecting Investos 12
Exchange ates: Definitions v Nominal Exchange ate Relative pice of the cuencies of two counties How many units of foeign cuency one can buy with one unit of domestic cuency v Real exchange ate How many foeign goods one can buy with one unit of a domestic good ε = e P P * ε eal exchange ate e nominal exchange ate P pice of a domestic good (basket of goods) P* pice of a foeign good (basket of goods) Exchange ates: PPP Let s detemine the eal exchange ate between a Micosoft Xbox 360 Kinect sold in Fance and in the US (souce: Amazon.com and Amazon.f on May 8, 2012) (Fance is the home county in this example) P Fance = 186; P US = $199; e = 1.30$/ 1.30 *186 ε = =1.21 199 Accoding to this example is the euo ove/undevalued? What is the nominal exchange ate that will peclude abitage? 13
Exchange ates: PPP Exchange ates: PPP 14
Exchange ates: Movements v When the value of the domestic cuency inceases/deceases unde a flexible exchange ate egime, then this cuency appeciates/ depeciates. v Unde a fixed exchange ate egime the coesponding tems ae evaluation and devaluation. v We can epesent the link between nominal (NER) and eal exchange ates (RER) in tems of pecentage changes: % change in RER = % change in NER + Domestic inflation - Foeign inflation Inflation and the Nominal Exchange Rate Long-un Dichotomy % change in RER = % change in NER + Domestic inflation - Foeign inflation Pecentage change in nominal exchange ate 10 9 8 7 6 5 4 3 2 1 Sweden Austalia New Zealand Spain Ieland Canada South Afica Fance UK Belgium 0-1 Gemany Nethelands - 2 Switzeland - 3 Japan - 4-3 - 2-1 0 1 2 3 4 5 6 7 8 Inflation diffeential Souce: Mankiw (Fig.5.13). Aveages fo 1972-2000. Italy Depeciation elative to U.S. dolla Appeciation elative to U.S. dolla 15