1. International Macro & Finance
Dave Backus
Joke
Name: finance as opposed to trade, but I’ll focus today on intl cap markets
Weak underbelly, but interesting issues
Goals: coauthors wanted.
Comments any time.
© NYU Stern School of Business, October 2004

2. Accounting
I’m now the head?

3. BOP: Net exports + capital inflows = 0
Goods
Country 1
Country 2
IOUs
Say: NX = CA
Plus: focus on goods
If Country 1 runs a trade surplus:
There is a capital “outflow” for Country 1, “inflow” for Country 2.

4. US balance of payments Net exports -498.1 Net labor income from ROW
-5.5
Net capital income from ROW
38.8
Net taxes and transfers from ROW
-67.4
Current account
-530.7
Net direct investment in US
133.9
Net purchase of private securities
251.0
Net purchase of US govt securities
248.6
Net loans and other
-102.8
Capital and financial account (“inflows”)
542.7
Statistical discrepancy
-12.0
US trade deficit = borrowing
Look at types of flows
US$b, 2003, from BEA.

5. More balance of payments
Arg
Auz
France
Mexico
Poland
Net exports
-1.8
-4.4
20.2
-11.7
-10.9
Net foreign income
-7.5
13.7
-13.5
-1.5
Net transfers
0.3
0.0
7.0
2.4
Current account
-9.0
-15.3
20.5
-18.2
-10.0
Net direct investment
10.6
6.2
-126.3
13.3
9.3
Net portfolio investment
-2.4
9.9
36.2
-0.9
3.3
Net loans and other
0.7
-1.4
59.9
5.7
-2.5
Official reserves
0.4
1.4
-2.9
-0.6
Capital transfers
0.1
0.6
Capital and financial acct
9.4
16.7
-26.5
15.2
9.6
Errors & omissions
-0.4
6.0
3.0
Say: NX = CA
Plus:
US$b, 2000, from IMF, BOP Yearbook, 2001.

6. US international investment position
US-owned assets abroad
7,864.0
Direct investment
2,730.3
Corporate equity
1,972.2
Bonds
502.1
Loans and other
58.4
Reserves & govt
268.3
Foreign-owned assets in the US
10,515.0
2,435.5
1,538.1
Corporate bonds
1,853.0
US govt (treasuries, currency, official)
2,334.6
2,353.8
Net investment position
-208.5
Compare FDI to equity
US$b, 2003, from BEA.

7. International investment positions
Auz
Chile
France
Poland
Spain
Assets
209.1
18.6
2,407.2
44.6
558.3
Direct investment
82.0 na
1,006.2
1.0
160.4
Portfolio investment
58.4
614.3
1.6
169.1
Loans and other
49.8
3.8
723.1
14.6
193.3
Reserves
18.8
14.8
63.6
27.5
35.6
Liabilities
417.6
39.3
2,347.0
99.3
672.3
112.1
702.7
33.6
142.4
229.8
9.1
869.1
18.1
242.8
75.7
30.2
775.2
47.7
287.2
Net investment position
-208.5
-20.7
60.2
-54.7
-113.9
table across countries
US$b, 2000, from IMF, BOP Yearbook, 2001.

8. Net international asset positions
Light lines: cum CAs
Dark lines: directly estimated
Note: Japan v US
Source: Lane and Milesi-Ferretti, JIE, 2001.

9. Net international asset positions
Source: Lane and Milesi-Ferretti, JIE, 2001.

10. Net international asset positions
Note 1980s debt crisis
Why not issue equity claims?
Source: Lane and Milesi-Ferretti, JIE, 2001.

11. “Arbitrage opportunities” in “arbitrage-free” “models”
“Facts”
“Arbitrage opportunities” in “arbitrage-free” “models”
Add quotes, tell Zin story.

12. Growth Associated with quality of internal capital markets
Not associated with openness of capital markets (except Cam Harvey)
Conjecture: interaction of bad markets and openness leads to crises
First some context:

13. Globalization: world trade
Source: Bergoeing and Kehoe, “Trade theory and trade facts,” ms, 2003.

14. Globalization: US trade
Source: Bergoeing and Kehoe, “Trade theory and trade facts,” ms, 2003.

15. Globalization: rich countries
A reminder that even rich countries had serious capital controls (eg, UK).
Source: Prasad, Rogoff, Wei, and Kose.

16. Globalization: poor countries
Source: Prasad, Rogoff, Wei, and Kose.

17. Globalization: investment restrictions
Equity only
Source: Edison and Warnock, JEF, 2003.

18. 1. Net capital flows are small
Source: Feldstein & Horioka, EJ, 1980.

19. Net capital flows were larger < WW I
Draw 45-degree lines
Mirrors trade patterns
Empire? Gold standard?
Source: Jones and Obstfeld, NBER 6103.

20. Net exports before WW II
Why?
Empire? Gold standard?
Percent of GDP, Auz (green), Canada (red), Sweden (yellow).

21. 2. Net exports are countercyclical
Country
Std(y)
Std(nx/y)
Std(c)/Std(y)
Corr(nx,y)
Corr(r,y)
Argentina
4.22
1.42
1.08
-0.89
-0.63
Brazil
1.76
1.40
1.93
-0.03
-0.38
Korea
3.54
3.58
1.34
-0.86
-0.70
Mexico
2.98
2.27
1.21
-0.87
-0.49
Philippines
1.44
3.31
0.93
-0.40
-0.53
Avg
2.79
2.40
1.30
-0.61
-0.55
Australia
1.19
1.02
0.84
-0.59
0.37
Canada
1.39
0.76
0.74
-0.01
0.25
Netherlands
0.67
1.17
-0.28
0.34
New Zealand
1.99
1.31
0.82
-0.06
0.07
Sweden
1.35
0.86
1.01
-0.23
-0.05
1.37
0.92
0.20
Circle corr(nx,y)
Source: Neumeyer and Perri, NBER

22. Economist forecasts CH SW Jap FR IT UK ES US Auz
Equity only IT UK ES US
Auz
Source: The Economist, Aug 7, 2004.

23. Capital flows in Mexico

24. Capital flows in Indonesia

25. 3. North-South flows are small
Ratio of Net Foreign Assets to GDP for rich and poor countries.
Source: Lane and Milesi-Ferretti, JIE, 2001.

26. 4. Direct investment is less volatile
Source: Albuquerque, JIE, 2003.

27. Direct investment and corruption
Source: Wei, BPEA, 2001.

28. Direct investment and rating
Source: Albuquerque, JIE, 2003.
Question: what governs the form of the contract?

29. 5. Home bias in equity portfolios
(i) Most of the world doesn’t have traded equity
(ii) US equity includes FDI claims
(iii) US listing of ADRs critical
Source: Ahearne, Griever, and Warnock, JIE, 2004.

30. 6. Real exchange rates Volatile and persistent
Not associated with any obvious fundamentals (“disconnect”)
But:
Related to industry output, investment, and employment once input/output structure has been considered
Relative price of nontraded goods

31. Exchange rates and nontraded goods
Canada
Source: Betts and Kehoe, ms, 2004.

32. 7. International equity returns
Returns not equal across countries – currency? Risk?
Monthly, ip and stock returns
Low freq output?
Source: Dumas, Harvey, and Ruiz, JIMF, 2003.

33. 8. US current account Source: Obstfeld and Rogoff, ms, 2004. Big deal?
Why?
Connection to LL? (consumption)
Source: Obstfeld and Rogoff, ms, 2004.