Beruflich Dokumente
Kultur Dokumente
-si*
http://www.archive.org/details/currentaccountsiOOkraa
HB31
.M415
4.-
t** C
Jaume Ventura
No.
97-12
July, 1997
massachusetts
institute of
technology
50 memorial drive
Cambridge, mass. 02139
WORKING PAPER
DEPARTMENT OF ECONOMICS
Jaume Ventura
No.
97-12
July, 1997
siOL 3
1997
Jaume Ventura
M.I.T.
July
1997
in international economics: What response transitory income shock such as a temporary Is the current account to a Improvement In the terms of trade, a transfer from abroad or unusually high production? To answer this question, we construct a world equilibrium model in which productivity varies across countries and international borrowing and lending takes place to exploit good investment opportunities. Despite Its conventional Ingredients, the model generates the novel prediction that favourable Income shocks lead to current account deficits In debtor countries and current account surpluses In creditor countries. Evidence from thirteen OECD countries broadly supports this prediction of
the theory.
Rudi Dornbusch for discussing these ideas with us. We also thank Daren Acemoglu, Jakob Svensson and participants in seminars at Harvard, Princeton, MIT, Rochester and The World Bank for their useful comments. Further comments are welcome. Please contact the authors at akraay@worldbank.org (Kraay) orjaume@mit.edu (Ventura). The views expressed herein are the authors', and do not necessarily reflect those of the World Bank.
We are grateful to
Introduction
in
international economics:
What
is
improvement
production?
in
To answer
we
in
which
and
international borrowing
its
conventional ingredients,
the model generates the novel prediction that favourable income shocks lead to
current account deficits
in
in
creditor
prediction of
the theory.
how
is
as a benchmark
Suppose
saves
this
domestic capital and foreign loans. To the extent that the shock does not affect the
expected
is
profitability of future
investments at
home and
assets
the
same
in
a greater increase
domestic capital
minus investment).
at
Conversely,
in
exceeds investment
home,
as a portion
account surplus
creditor countries.
The sharp
assumptions.
result that
comes
First,
in
foreign capital
is
not an option for the country. Third, the marginal unit of wealth
allocated
among
is.
We
maintain the
first
first
assumption
a basic tenet of
failures of the
we
still
we focus on
easily removed.^
we keep
the
deficit
and only
if
in
equivalently,
and only
if
foreign debt
outward foreign
The
is
devoted
to
assessing the
merit of the third assumption underlying our simple example, namely, that the
is
invested
in
the
same
To do
so,
we
which productivity
to exploit
and
international borrowing
good investment
uncertainty
we
distinguish
In
between production
technology.
"good" production functions that exhibit high average productivity, while other
countries have "bad" production functions that exhibit low average productivity.
In
is
uncertain.
We
use the
of consumption-smoothing depends on the frequency of the data one is obviously important for the analysis of quarterly data (most people spend more than they earn over Christmas and other holidays, and somewhat less than they earn in other times), and almost as surely is a bad theory for understanding savings rates over a quarter of a century. See Deaton (1992) for a survey of evidence on intertemporal models of savings.
^
The importance
It
analyzing.
is
Moreover,
this
economies
that
assumption is consistent with the strong home equity preference in OECD has been documented by French and Poterba (1991) and Tesar and Werner
phenomenon.
term output shock to refer to production surprises. These shocks do not affect the
probability distribution of future productivity and,
as a
result,
income or wealth
effects
economic environment
that
change
their "bad"
persistent
on the average
level of productivity,
and we
them
productivity shocks.
In
we assume
As a
shares
of
wealth invested
i.e.
in
expected
and
volatilities.
we
find that
is.
we
shocks
in
account surpluses
to productivity shocks.
We find
instead that favourable productivity shocks always lead to current account deficits, as
investors react to the increase
in
increasing their holdings of domestic capital and reducing their holdings of foreign
loans.
The usefulness
of this
benchmark model
is
that
it
assumptions that underlie our example: shocks have only transitory income
investors exhibit constant relative risk aversion,
and there
is
no labour income.
We then
proceed
to relax
these assumptions.
First,
we
find that
if
relative risk
aversion decreases with wealth, positive output shocks raise wealth and induce
investors to take riskier investment positions.
As a
result, the
in
invested
if
in risky
its
share
wealth. Second,
we show that,
labour income
less risky than capital income, positive output shocks raise the
ratio of financial to
human
risk.
This
wealth, and so
in financial
domestic capital
falls
short of
its
share
We obtain a simple
rule to
current account deficit: the country's debt has to exceed a certain threshold that
depends on how
of labour
in
zero
the case of
Our research
account.^
models
of the current
The
Obstfeld (1982), Dornbusch (1983) and Svensson and Razin (1983), were designed
to
study the effects of terms of trade shocks and to develop rigorous theoretical
effect.
We
smooth consumption
over time. However, since these models abstract from capital accumulation, income
in
foreign loans.
As a
to current
account surpluses
countries.
Simply allowing
result of this paper,
for capital
accumulation
is
is
of
diminishing returns at the country level, uniquely determines the domestic stock of
"
for
productivity shocks.
do not
countries.
risk
has
how
Once investment
is
modelled as a
the latter increases with the share of wealth held as risky domestic capital, transitory
do
raise wealth,
must
in
part
be invested
in
domestic capital
be
satisfied.
In particular,
we
invested
in
in
domestic
capital
creditor
countries.^
The paper
is
Section 2 presents the main result of the paper. Section 3 explores the robustness of
this result.
OECD
countries.
Section 5 concludes.
economy in which accumulation and investment risk. The latter arises from a stochastic depreciation rate. This model is used to show that cross-country differences in the rate of time preference could explain the Feldstein-Horioka finding that savings and investment are highly correlated in a cross-section of countries. Interestingly, he finds a U-shaped relationship
Zeira (1987) provides an overlapping-generations model of a small open
is
there
capital
between the steady-state level of debt of a country and its rate of time preference. He does not however explore the effects of transitory income shocks, as we do here.
1.
A Model
of International
The world
equilibrium
is
that
international borrowing
and lending
At each date,
some
average
that
exhibit low
average
productivity. Investors in
r,
which
determined
in
world equilibrium.
We
assume
enough
own
stock markets.
We
assume
markets
is
high
enough
This
is
that only
preference observed
economies.^
We draw a distinction
the state of technology.
In
in
production functions.
We
which occur during these normal times. Since these shocks do not
probability distribution of future productivity, they
have only
transitory
income or
in their
economic environment
that
on
their
average
level of productivity.
We
in
as productivity shocks
See See
lending
^
and cLarida (1990) for world equilibrium models in which borrowing and motivated by cross-country variation in rates of time preference. Obstfeld (1994) for a discussion of the effects of financial integration in a model similar
Buiter (1981)
is
to ours.
have
income or wealth
effects
A number of
arguments.
j=1,2,...
.
many
This allows us to rule out large-country effects and concentrate on the pure
we assume
good
which
is
used
for
focus on
trade.
intertemporal trade
Finally,
commodity
we
restrict
on the
effects of country-specific
shocks as opposed
to global shocks.
While these
assumptions simplify the analysis considerably, we are convinced that removing them
would not
arguments.
Production
is
random. Let
qj
and
kj
Also, define
ttj
as the state
of
technology of
this country.
is:
Conditional on
ttj,
representative firm
dqj =7ij-kj-dt
+ akj-dej
(1)
where a
is
GjS
E[d9j ]=dt
and E[d9jd9m]=0
j>m. Equation
which states
depreciation)
that, conditional
in
on the state
country
is
E[dqj]=7rjkjClt
dt
and
shocks do
E[dqjdqni]=0
not
j^vn.
Realizations of
tine
change the
wealth effects on the owners of the firm, but do not affect their investment strategies.
Average
and over
time. At
each date,
half
=n
in
low-productivity regime, n^
follow
a Poisson-
directed process:
fO
dTii
'
(j)
dt
(2)
\g{n-.)
(j)dt
\n-K
where
g(7i;i)
'
if ., If
TCj
'
= =
7t
;
{_
\n
(j),
n and n are
n - 5 < a^
7ii
7t
if
j;^m.^
Equation
changes
the
in
regime are
continuous
Equation
in
limit of
in
in
regime
are productivity shocks. Since these shocks change the probability distribution of
effects
on the owners
of the firm,
infinitely
many
will
countries,
It
each period a
if
fraction
(t)dt
of the high(low)-
productivity countries
change regime.
follows that
in
are
initially in
each
always be
each regime.
identical firms in
is
to existing
The
representative firm
divided into
value of one and deliver an instantaneous dividend equal to the flow of production
realizations of past
dTij
probability
and
are
known by
investors before
production starts. However, the realizations of the contemporaneous shocks d9j and
dnij
are only
known
after production is
their
is
observed. Since
investors
must commit
starts, their
investments are
is
completed,
their
shocks.
Tijdt+adcoj,
where
doOj
dt
return
and
volatility of
holding a share of
tij
and
o, respectively.^
identical
function:
EjlnCj-e-P'dt
(3)
to the
Despite the fact that productivity shocks affect the return to investment, they do not contribute mean and variance of the return process since both they occur infrequently (with probability of order dt) and they are small (with magnitude of order dt).
where q
is
consumer
in
is
country
held
in
j.
Let
Hj
and
Xj
be the wealth
respectively.
consumer and
equity,
We
assume
constraint
is:
daj
= [((jtj - r)
Xj
+ r)
aj
- Cj
dt
+ aXj-aj-dcOi
(4)
This budget constraint illustrates the standard risk-return trade-off behind investment
decisions.
If 7i:j>r,
increases
in
expected return
to wealth
1
by
(nj-r)aj
by aaj.
In
Appendix
we show
consumer's problem
is:
Cj=p-aj
(5)
Tt|
-r
Equation
consumption
i.e.
r, tij
is
is
independent
of asset characteristics
and
in
c. This is the
substitution effects of
changes
(6)
consumers. Equation
shows
each asset
level of wealth,
in
characteristics,
and
a,
This
is
we used
the example
the
introduction.
10
World Equilibrium
To
find the
world interest
rate,
we use
tlie
international loans,
^(aj -kj) =
0,
Equation
(6) to obtain:
= n-a^
(7)
where
n=
lim
j^~ J
^
'-'
Kj
'-^j
In
Appendix
we show
lim-.Tai
j^-J
.^,
steady-state
in
which both the world growth rate and the world average productivity
are constant.
In
what
follows,
we assume
economy
is
already
in this
steady state.
in
Equation
(7)
rule in
we
''
71:
-7t^
^i
ki
= 1+
.
'
o'
(8)
Equation
stock of a country
is
increasing
in
both
its
wealth
and
its
which
all
the capital
is
located
in
productivity. In the
presence
we have assumed
i.e.
that
productivity differences are not too large relative to the investment risk,
S-u < a^
all
in
equilibrium.
11
is
economy
exhibits
rich
To see
this,
da.
a.
7ti
-71
a+-
+ n-c^ -p
TZi-n
dt
+ a+-
dCO;
(9)
The growth
to wealth ratio.
The
first
term
in
Equation
(9) is the
and
is
average return on
in
Equation
(9) is the
unexpected
component
in
more
volatile in high-productivity
in
risky capital.
12
2.
equilibrium
in
which high-
have
access
to better
latter.
The amount
that highrisks.
limited only
by
j,
their willingness to
i.e. fj=aj-kj
,
bear
To see
(8) to
of country
find that:
jt
that, for
a given
level of
investment
productivity differentials. Also note that, for a given productivity differential, the
volume
of
borrowing
is
is
the investment
risk. Finally,
if
observe that a
if it
country can
move from
and only
Next
First,
we examine
in this
world equilibrium.
we
comment on
its
salient features.
Second, we provide an
intuition
as
to the
that
determine
how
we emphasize
the differences
in this
world, a
in
clearly at
policy circles.
productivity distinction.
There are two reasons. From a theoretical viewpoint, one could defend
13
is tfie
ctiange
in
i.e. dfj,
we
apply
for
lemma
to (10)
process
foreign assets:
/
df;
Kj
-71
a+
4-71-a^
-p f-dt+|a+^
^
J
fdcOi+f
'-
(11)
Equation (11) states that net foreign assets follow a mixed jump-diffusion process
of their
dynamics as a function
du:
dt
of the
and
drtj
(remember
that dcO:
+ dB:), andallthe
a, p,
(j),
n and n
Consider
account
in
first
model
for the
yields:
E[d,,]
TCi
-Tt
<t)g(Ttj)
+ n-<f -p
fdt +
Kj
f-dt
-n
(12)
choice by pointing out that the debtor/creditor distinction is more robust, in our model, only cross-country differences in average productivity determine whether a country is a debtor or a creditor. If we assume, for instance, that high average productivity is associated with high
this
volatility in
production, it is then possible that the high-productivity technology might be unappealing enough to turn high-productivity countries into creditors (see Devereaux and Saito (1 997)). In this case, all the results presented in this paper would still hold true for the
debtor/creditor distinction, but not for the high/low productivity distinction. From an empirical viewpoint and anticipating that the predictions of the model will be confronted with the data, one could defend the use of the debtor/creditor distinction based on the observation that
existing measures of net foreign asset positions of countries are of those of their average productivity.
much
14
'
Equation (12) separates the expected current account into two pieces, whicli capture
the effects of expected savings
in
The
first
by agents.
If
a+
Ttj
-71
Ti
,2 > (<) -a
consumers
will find
it
to
"tilt"
their
in
consumption
profile.
These savings
assets
the
same
means
deficits,
that, in
The opposite
in
is
true in
mean
reversion
in
above
its
long-run average.
is
expected
converse
is
true for
means
The balance
all
of
ambiguous
in
the
parameters of the model. The faster the economy grows and the smaller the meanreverting
component
of productivity
is,
the
more
likely
it
is
that
on average debtors
and
to the
To see
this,
note that
it
and the
shocks
that:
\2
rV^\\
Var
[dfj
a+^
^
J
(l)fdt
(13)
V^i-^7
15
In
normal times
(i.e.
cl7i:j=0
and
account are driven by the output shocks. These shocks have small effects
dt'"^)
order
1).
captured by the
first
some
infrequent
dates
(i.e.
of the current
account
is
do have large
effects
(of
order 1)
is
to
Shocks
We
that the
are
now ready
to
response
is
of the current
country
Since
a+
n-
-K
>
,
i.e.
in
o
debtor countries and a current account surplus
intuition for this result,
in
creditor countries.
To develop an
we
in
income,
is
it
is
saved
(recall
Equation
is
(9)).
This
is
true regardless
whether a country
a debtor or a
creditor,
and
models
Having decided
to
to
We
16
in
how we model
to the
in
can be interpreted
terms
of
7t
=r + cT^--!-
(14)
to equity,
Kj,
world of
premium
is is
and the
in
The
larger
is
the share of
is
domestic capital
risk
this
the
premium
The
additional
savings that result from the output shock allow investors to increase their holdings of
risky
same
one, an increase
in
a greater increase
in
domestic capital
in
creditor
this
in
in
wealth increase
is
creditor countries.
risk in
that this
form of uncertainty
investment
is
is
important, existing
activity,
models
a riskless
17
how
response
of the current
account
to productivity
shocks.
since
o+
n-
-n
>
,
o
productivity shock,
i.e. d7ij>0,
(1 1
shows
that
a positive
account
deficit in
is
creditor countries.
further
This effect
discussion.
and requires no
effect
on investment since
a creditor (debtor)
it
changes the
When
generates an investment
boom
(bust).
The counterpart
is
response
a current account
deficit (surplus)
and
reflected
in
productivity
shocks consist
on
much
income effects
of the
same
shocks
(of
order
dt).^"
they would
show up as
^^
The
large equity
premium observed
in
prediction of this
model
should be larger
not
^^
in
is an important premium, o^+Hj-n, our knowledge, this result is new and has is
substitution effects of changes in the expected return to our world of logarithmic consumers. In models with more general preferences these rate-of-return effects of productivity shocks could be associated with consumption booms or busts, depending on the balance of their income and substitution effects. ^* And, for that matter, much larger than the income effects of output shocks (of order dt'^).
equity cancel
18
3.
Investment Strategies
different in debtor
and
and
return. to invest in
However, there
the
of labour
returns
and changes
in
of the
investor's environment.^^
general finding of
The purpose
holds
in
of this section is to
show
the generalized
model presented
However, we
to
when a
positive output
shock leads
that
a current
(1)
account
exceed a threshold
(2)
depends on
how
and
zero
in
the
benchmark case
of
constant relative
risk
We therefore
shocks lead
to current
account
deficits in sufficiently
See Merton (1995) for an overview of this research, and Bodie, Merton and Samuelson (1992) for an example with risky labour income. do not explore the implications for our argument that arise from the possibility that asset
We
returns
to
be correlated with changes in the investors' environment. These correlations give rise a hedging component in asset demands that greatly depends on the specifics of the model.
19
Two Extensions
To
allow attitudes toward risk to vary with the level of wealth,
utility
we adopt
the
following Stone-Geary
function:
oo
Ejln(Cj+pj)e~P'dt
(15)
where the
PjS
The
coefficient of
i.e.
and over
time, as follows.
risk
aversion
is
decreasing
in Pj.
More
as
their level of
consumption increases.
^^
that there
is
an additional technology
uses labour
to
^^
country to one, the flow of output produced using the second technology
A,j
given by
dt
Labour
productivity,
?ij
is
assumed
to
be constant although
it
might vary
marginal
their
^jdt.
The existence
of labour
slightly the
a^
adcOj
(16)
As is well-known, consumers with Stone-Geary preferences might choose negative consumption. We ignore this in what follows. The assumption of an aggregate linear technology between labour and capital is much less restrictive that it might seem at first glance. It arises naturally in models where some form of factor-price-equalization theorem holds. One could, for example, use the model in Ventura (1997) to endogenously generate a linear technology. We do not do so here to save notation.
^^
20
To ensure
that
all
in
equilibrium,
we assume
n-G^
The
representative
consumer
and the
residing
in
in
(correct
(2). In
is:
is
constant and
follows the
dynamics
in
Equation
Appendix
we show
this
Ci=py
a+-^
'
(17)
J
Xi
=
r-a^
J
Tti
-r
illustrate
how
optimal consumption
and investment
rules
first
depend on both
that
if
of labour
income. Note
is
consumers
X,j=0,
and there
no labour
income,
model (Equations
(5)
and
As
before, consumption
in
is
linear
shows
if
devoted
to equity
first
if
and only
To
that
Pj>0,
consumers
and so choose
to allocate
a smaller share of wealth to risky domestic capital as their wealth increases. Second,
note that
in
A.j
>0, increases
in financial
human
investor to greater
In
21
strategies,
of financial wealth
devoted
to risky
domestic capital
risk
falls.
Finally, holding
i.e.
aversion,
i.e.
high values of
high values of \,
will
their
World Equilibrium
To compute
we impose once
J
again the
^^aj -
kj
=0
1
(7) is
still
valid.
Appendix
shows
that,
if
lim
--^^.j +Pj = ~*
^
j=i
"^
in
what
follows,
we assume
is
that this
satisfied
and
that
the world
economy
is in
The world
is
now
given by a straightforward
ki
^i+^A
(
1
T^\-A
'
-
(19)
<J
As
is
increasing
in
both
Its
productivity
and
wealth,
is
non-degenerate since
countries
71
-a
j-
jointly
ensure that
all
22
in
whose
high
Pj
residents
for risk
i.e.
and/or
X,j,
capital stocks.
We find,
world
once more,
exhibits
average growth
rate
is
constant, the
substitute
economy
rich
To see
this,
(7) into
in
Equation (16)
to obtain:
da.
a+-
+ K-a^-p
^i+Pi
Kj
-Tt
1
L +a
+
dco,
dt
+ o+
a(7r-(/)
a(7r-o^)
(20)
As
grow
faster
volatile
growth than low productivity countries. Perhaps the most interesting difference
between
(/\.j+Pj<0),
this
in
Equation
(9) is that,
if
^j+Pj>0
volatility of
If
a smaller
(larger)
share of
their
expected return on
their
in this
distribution of loans
19
The
first
parameter
restriction
ensures the
first
parentheses
in
Equation (19)
is
positive.
23
^2
n-a
(21)
[
As
before, the
in
order
in
advantage
in
home. This
is
reflected
the
term
Equation (21).
and the
who have a
high (low) tolerance for risk and/or a large (small) stream of riskless
likely to
be debtors.
We find the
Ito's
lemma
to
\2
dfjV
a+
/
Ttj
-7t^ (
X-.
+ 7c - a - p
dt
+ a+-
+P
f
dcoj
fi+-
+
V
K-O
7t-a^
V n-c
(22)
^i+pi
drt:
K;
-n
The
current account again follows a mixed jump-diffusion process, with dynamics that
in
d9j
and
drtj,
and
that
k ,n
X,j
and
Pj.
Since
we have assumed
thought of as
may be
describing the determinants of the current account for an average or "typical" country
where
>.j+Pj=0.
Comparing Equations
(22)
and
(11),
we see
24
provided that
we
replace
fj
with
n-a
Thus,
ail
generalize
in
this
is
used. Accordingly,
we
restrict
account
to output
shocks.
Since o +
K- -n >
Equation (21
shows
i.e.
o
d9j>0, leads to a current account deficit
in
countries where
fj
^i+Pi + ^<
n-a
and a
surplus
in
countries
where
fj
n-a
savings behaviour
>
This result
is
in
in
the
model
consumption
in
Where our
we
Equation (14).
K =r +
a'-^-7
aj
^r
'-^
(23)
(K-a^)-aj+^j+Pj
The
risk
premium
is
The
first is
return
portfolio,
which
is
is
the
volatility of
and the
larger
is
domestic equity,
is
25
(7i-a^)-aj
of the investor's value function,
r
was equal
In
to one. In this
relative
more general
setting,
it
depends on both
and the
is
our results
decreasing (increasing)
in
now
If
shock
is
invested
in
exactly the
if
same
premium
falls (rises)
>lj+Pj<0 (>.j+Pj>0),
and Equation
(23)
for the
in risky
unit.
This result qualifies the relationship between debt and the response of the
current account to output shocks.
(debtor)
If
may be
a creditor
to
deficit (surplus) in
response
output shocks that raise wealth induce investors to take riskier investment positions.
As a
result, the
its
unit of
wealth invested
in risky
domestic capital
exceeds
share
of this effect,
is
some
ratio of financial to
investment positions
in
wealth,
shock invested
domestic capital
falls
short of
its
share
in financial
wealth. Hence,
The
as apposed to the coefficient of relative risk aversion of the utility function, which tells us how the consumer values different lotteries over consumption. The latter depends only on preferences, while the former depends on both preferences and other aspects of the consumers' environment.
values different
26
some
in
response
to
In
summary, we
find
account
to
threshold
-fj
>
'
Tt-a
deficit.
positive or negative,
Finally,
and
in
is
equal to zero.
we can
7tj>7i.
That
is,
high-productivity countries
and
low-productivity countries.^^
Once
again,
remember
that this
is
a consequence
of
in volatilities.
See
footnote 11.
27
4.
Empirical Evidence
In this section,
we
present
some
as suggestive that
in
we
are capturing
some aspects
of the
X-^+^i
We
and
TCj
are unobservable. Hence, the threshold level of debt above which output
to current
shocks lead
account
deficits
this
assumption,
the content of our theory can be understood as a probabilistic statement that the
higher
is
more
likely
We take
per capita
GNP
growth as an imperfect
is
measure
does not
of the
imperfect since
it
distinguish
the data,
we would
growth
expect
is
GNP
smaller
we
study
how
debt
a country.
Data
we
require appropriate
measures
of debt
and the
We construct a measure of debt using data on the international investment positions (MPs) of OECD economies as reported in the International
Monetary Fund's Balance
of
Payments
Statistics
Yearbook. The
IIP is
a compilation
in
of estimates of stocks of
the
^^
The
is
Pr(^+Pi>-rfj)=Pr(7ij>7i)=1/2.
level of
is
which
increasing
28
capital
of
payments, valued
at nnarket prices.
We
measure
debt as minus one times the net holdings of public and private bonds, and other long-
and short-term
ratio to
and
non-official sectors,
expressed as a
debt cannot be
it
measure
of
used
to infer the
capital, since
does not
in
three forms: debt, domestic capital, and capital located abroad. Accordingly,
subtract outward foreign direct investment
we
and holdings
of foreign equity
by domestic
residents from debt to arrive at an "adjusted debt" measure. Figure A1 plots the time
series for debt
OECD
economies
for
which
we
are
sample
of
13
OECD
first
it
is
measures. The
fraction of
expressed as a
GNP,
located abroad.
The
third
first
two
We
measured
in
the international
are
in
measure
as well as revaluations
in
change
in
the IIP
substantial
in
most countries.
The
final
sample
of countries
of the
is
complete description
data
is
availability for
these series.
29
in
We
first
are
now ready
to
account varies
The
level of adjusted
the second column reports the time-series correlation of the current account surplus
(expressed as a share of
GNP)
GNP
same
period, for
each
debt
while
is
of the countries in
is
our sample.
account
countercyclical
(Sweden
is
in five
is
procyclical (Japan
highlighted
in
Figure
There
is
is
in
Table
some
To
poses no
However,
if
changes
in
in
1
Figure
may obscure
in
the cyclicality
concern,
we adopt
the
following strategy.
we
pool
all
by
their
adjusted debt.
We then
divide the
sample
in
two
at
a particular threshold
the cyclicality of
level of
we compute
the current account for the two subgroups and test whether they are significantly
different.^^
^'*
We
all
We test for
First,
we
account on per capita income growth in the two subsamples. Under the assumption that the two point estimators are independent and asymptotically normal, we can construct the usual Wald statistic for the null hypotheses that the slope coefficients are equal in the two
30
Figures 2(a)-2(d) present the results of this robustness check for various
subsamples
of the data, in
in
each
current account
divided
in
The dashed
line
reports the p-value for a test of the null hypothesis that the cyclicality of the current
account
is
equal
in
all
1971
to
and countercyclical
in
range
level.
of
5-10 percent
same
subsamples
of
the data. Figures 2(b) and 2(c) restrict the sample to the 1971-81
and 1982-93
is
in
if
in
we
done
in
we emphasize
In
in in
account behavior
countries arises from the the differential investment response to output shocks.
is
allocated to domestic
this fraction
is
The
third
and
fourth
columns
of
Table 2 provide
some rough
theory.
The
third
between
per capita
correlation
GNP
In all
countries, there
at
is
a strong positive
annual frequencies,
some
portion of
shocks
to
in
subsamples.
Savings
is
cyclicality of the
the two groups of countries. defined as net national savings, expressed as a fraction of
GNP.
31
As
in
is
no obvious
between the
of
level of
column
savings and the current account. Consistent with the theory, there
a strong
negative relationship between the level of debt of a country and the correlation of
In six
in
OECD
economies
is
alternative explanations which might account for the difference in current account
cyclicality
creditor countries.
First,
in
OECD-wide economic
In fact,
expansions tend
series correlation
interest rates.
the timein
between
is
OECD average
it
per capita
GNP
the
six-month
LIBOR
in
0.55. Thus,
is
countercyclical
booms
Second,
on foreign
capital, current
much
can
potentially
account
example,
This of course does not rule out other explanations for the procyclicality of savings. For if booms redistribute wealth from individuals with low savings propensities to individuals with high savings propensities, savings would also be procyclical. However, as long
in this
as individuals allocate their wealth using investment rules such as the ones discussed paper, our effects would still arise. See Costello (1993) and Kraay and Ventura (1997)
32
of current
accounts
in
that,
notion that they are high-productivity countries, debtor countries tend to invest less
in
all
among
assets
the
same
wealth, favourable income shocks that are correlated across countries current account deficits
in
produce
claims on debtor country capital than residents of the debtor country purchase
abroad.
In
was on average
In creditor
5.6%
of
GNP,
these countries
was 9.8%.
To adequately
we
revisit
in
the
world
and
is
done
in
3,
which report
the partial correlation between the current account surplus and domestic per capita
GNP
LIBOR and
rate of
OECD
per capita
GNP
in
question.^
Now
country correlation between the level of adjusted debt and the cyclicality of the
current account remains negative,
of dividing the
full
and
is
sample
and
levels of debt.
The
pattern which
emerges
is
However,
is
we can now
the
only reject the null hypothesis that the cyclicality of the current account
same
in
debt.
further concern might be that productivity shocks account for a larger share of fluctuations per capita GNP growth in debtor countries than in creditors. Although there are no a priori reasons to believe in this asymmetry, it is possible that our results are driven by it. We did experiment with controlling for various proxies for productivity shocks, and obtained
in
33
5.
Concluding Remarks
we have
account
deficits in
and surpluses
in
creditor countries.
is
same
proportions as the
definition the
in
a greater
deficit
Conversely,
exceeds investment
home,
as a portion of
wealth increase
is
account surplus
creditor countries.
in
We
that,
if
investors' risk
is
a simple
deficit:
a current account
the
country's debt has to exceed a threshold that can be either positive or negative, and
is
zero
in
We
is
have
also provided
some
OECD
countries that
willing to
not
Sovereign
risk
and
left
we have
unmodelled here.
We feel
confident
however
would survive
all
most
paper
is
the
absence
of
economies
investment
is
not "bang-bang" as
we have assumed
adjustment costs greatly simplifies the analysis, while permitting us to isolate the
34
at wor[<.
is
all
these
forces are collapsed into a single instant, effectively precluding any meaningful
discussion of the dynamic aspects of the current account responses to shocks. are currently extending the theory to determine
to
We
how
shocks
new
results
regarding the dynamic aspects of the current account responses to both output and
productivity shocks.
35
References
Bodie,
Z.,
R.C. Merton and W.F. Samuelson (1992). "Labor Supply Flexibility and Portfolio Choice in a Life Cycle Model." Journal of Economic Dynamics and Control. Vol. 16, pp 427-449.
Buiter,
W.
(1981). "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model". Journal of Political Economy. Vol. 89, pp. 769-97.
Comparison
of Productivity
Growth". Journal of
Political
Economy.
Devereaux, M.B. and M Saito (1997). "Growth and Risk-Sharing with Incomplete International Asset Markets". Journal of International Economics. Vol. 42, pp 453-481
Optimal External
French, K. and
J. M. Poterba (1991). "Investor Diversification and International Equity Markets". American Economic Review. Vol. 31, pp. 222-226.
Kraay,
A and
J.
Lewis, K. (1995). "Puzzles in International Financial Markets", in G. Grossman and K. Rogoff, eds. Handbook of International Economics. Amsterdam: Elsevier.
Matsuyama,
K. (1987). "Current Account Dynamics in a Finite Horizon Model". Journal of International Economics. Vol. 23, pp. 299-313.
36
and the Terms of Trade: Is There are Laursen-Metzler Effect?". Quarterly Journal of Economics. Vol. 97, pp. 251270. and Growth". American
Obstfeld, M. (1994). "Risk-Taking, Global Diversification Economic Review. Vol 84, pp. 1310-1329. Obstfeld, M.
and K. Rogoff (1995). "The Intertemporal Approach to the Current Account' in G. Grossman and K. Rogoff, eds. Handbook of International Economics. Amsterdam: Elsevier.
Persson, T. and L. Svensson (1985). "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later". Journal of Political Economy. Vol. 93, pp 43-65.
Rider, M. (1994). "External
Bank
Sachs,
J.
of
Debt and Liabilities of Industrial Countries". Reserve Australia Research Discussion Paper No. 9405.
(1981). "The Current Account and Macroeconomic Adjustment in the 1970s". Brookings Papers on Economic Activity. Vol. 1, pp. 201-68.
J.
Sachs,
in
the
Scandinavian Journal
Svensson,
L. and A. Razin (1983). "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect". Journal of Political Economy. Vol.
Tesar, L.L. and I.M. Werner (1992). "Home Bias and the Globalization of Securities". NBER Working Paper No. 4218.
Ventura,
J.
(1997). "Growth
of
Economics.
in
37
Appendix
1:
Solution Details
Here
we
in
the model of
in
Section
consumer
residing
in
in
country
to the
constant and
follows the
dynamics
in
Equation
(2).^^
for this
problem
is:
p- V(aj,7ij)=
max
>
ln(Cj
+Pj) +
Cj,Xj>|^
3V(a|,7i;|)
r,
-I
^-[((Kj
The
first
3V(aj,7ij)
=
Cj+pj
aaj
(A2)
^^
If
problem
is
correct
even
if
the world
economy
is
not
in
a steady-
state with
a constant
interest rate.
38
It
can easily be
Bellman
equation:
V(ai,Tr:)
= p-^ln aj+-^
+ g(7ij)
(A4)
where
g(7tj)
aj.
and (A3)
(6)
and
(18).
These
in
and
for the
case
of l^-^^-Q.
Here we show
that,
if
lim
-
"
^^j
j=i
+Pj =
in
which both the world average productivity and world growth rate are constants. Let H
Ttj
= n and L be the
,
Ttj
=n
contains the
same number
is
in
a =
lim
2 ^aj
and
'^"^ J
J6H
a=
lim
J^-J
ya
.
i
Also, define s
=
a+a
Using
^
this notation,
we can
'
interest rate
as
t!
+ (1 - s)
7t
- o^
Next
exists
distribution of
We
do so
in
which a =
or a = 0,
the condition
ds=0 requires
that
^^ =
a
^ a
Second,
we
39
''
assumption
that lim
.1loo J->-
1 V^, ^^
+(3:
'
=0, and
(t)dt
of countries
1=1
da =
+ (1-S)
n-Tz
+ a + (1-s)
lim
a,
dco
da
0-S
a
+ o+s
\ +s-7t + (1-s)-7i-a-p
a + ({)-(a-a)>-dt+
(A6)
\-
lim
-"y 3;
-dco
Third,
we
note that, conditional on the ajS and given that the shocks
dcoj
are
Numbers shows
ds=0
and only
that lim
j^
2 -y a,
J
jsH
-dco,
= lim
J-*- J
y
JeL
a,
dco:
=0.
Fourth,
it
follows that
if
if:
s(1-s)
(1-2S)
k-tC
+ 2(7i:-7t) + (t)(1-2s) =
(A7)
An
analysis of this equation reveals that there exist a solution s*e (1/2,1]. Hence,
initial
average productivity
that the world
easily
check
also constant.
40
Appendix
2:
Data Sources
in
Payments
Statistics
Yearbook
(5th
Subject to
availability, this
of various
at
market
in
these stocks
reflect
measure
In
we need
to distinguish
between
three
components
of the international
bond.
Similarly,
of
which
includes net public and private bond holdings and other long- and short-term capital.
Our sample
of countries
quality.
was determined
began
with a
We
sample
20
OECD
economies.^"
We then
checked the
research into national sources. For most countries, these two sources correspond
Greece, Ireland and Iceland were immediately dropped from the sample due to extremely coverage. The Balance of Payments Statistics Yearbook reports balance of payments data for an aggregate of Belgium and Luxembourg only. This reduces the original sample of 24 OECD economies by four.
limited data
41
quite closely.
to
New
Zealand due
we excluded
Portugal and Switzerland since IIP data were available only for eight years for each
of these countries.
Finally,
This resulted
in fairly
IIP
and
its
components
in
for
13 countries
payments
and
in
order to
^^
series.
in this
national accounts.
^^
for
not
available Turkey.
54 out
1970s.
of
total of
manner,
all
of
them
in
the early
42
Debt
(1)
Outward Investment
(2)
Debtor Countries
Finland
24.3 26.0
16.6
17.1
3.2
21.1
Canada
Australia
13.3
6.6
8.6
12.7 10.0
8.5
6.1
Sweden
Austria
Italy
8.5
2.4
3.3
1.7
6.5
3.3
Spain
Creditor Countries
4.5
2.8
France Japan
United States
2.2
-3.2
6.4
3.5
11.1
3.2
-3.5
5.8
6.3
-0.6
27.8
36.3
-21.5 -36.9
Debtor Average
Creditor Average
14.8
0.7
5.6
9.2
15.2
-14.4
c >
CO
c 3 o o
CO
>*
<
o c c QJ ,o t 3 TO o m i_ .c k_ o 1
O O o o d o o o o
in 05 CM cp
o o
m To o o To o o o
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1-^
CD
Cvl
W O
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^
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re 0)
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r--
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* O o d o
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O m CD CM CD d d d d d d
Tl-
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o CM d
O
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re
5 o o
c
re
Ql r:
M o
< o c Z E O
o c
c O o o o
re
o o
CM T- TjCD CO CD
r^ '^ r^ ^ O CO CM d d d d d d d
(^j
in f^ in en CM t^ CD CM -^ C3 c6
^ d ^
^ o d d
>
O
01
re
<
c
0)
c O u u
a.
- T3
O
I
So
O
^^
Z
^.
.
CL
>-:
CM
V
re
C^ $^
vn T- CO < 00 CD CO CM
CM 1^ Tf CD
C3>
f-^
CO ai CM CD CO
CM
CJ)
a)
Q D
0)
I/I
Q.
u
0) 0)
c 3 o
k.
o
o
TO re
c 3 O o
E o
(U
p <
c
o m
o) 2 5 > 0)
.2
re
c
a) re
i
(U
<
u.
1-
re
0)
.E .b
li-
O < W <
w a) 01 3 g 5 3
^
CO
're (2.
o c
re
re
ii
Ll-i?
B 5 o D Z
s^
.ti
a u
Adjusted Debt
(percent of
GNP)
GNP
Account Growth
Partial Correlation of
Savings
Debtor Countries
Finland
21.1
-0.03
-0.05
-0.13
Canada
Australia
12.7
10.0
8.5
6.1
-0.20
0.11
-0.02
-0.02 -0.15
-0.20
-0.31
Sweden
Austria
Italy
0.18 0.02
-0.33
-0.31
3.3
Spain
Creditor Countries
2.8
France
-4.2 -6.7
-7.9
-0.14 -0.13
-0.12
Japan
United States
0.08 0.24
-0.03
0.06
0,14
Germany
United Kingdom
-9.3
-21.5 -36.9
0.12
0.45
0.09
-0.03
Netherlands
9.2
-0.08
-0.13
0.01
-14.4
0.24
-0.55
-0.36
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