Key International Macroeconomic IssuesInstructor: Menzie ChinnEconomics 302Spring 2006Net Exports/GDPSource: BEA-.08-.06-.04-.02.00.02.041970 1975 1980 1985 1990 1995 2000 2005(EXPGS-IM PGS)/GDP(EXPGS-IMPGS_NOPET )/GDPX/GDPX/GDP(nonoil)Net Exports and Dollar Value-.07-.06-.05-.04-.03-.02-.01.00.01.02607080901001101201301401501975 1980 1985 1990 1995 2000 2005NX/GDP DOLLARVALUE_FEDMAJORREALX/GDP[left scale] Fed broad twxr (CPI) [right scale]The current acct. & budget deficit-.08-.06-.04-.02.00.02.041975 1980 1985 1990 1995 2000BuS/GDPCA/GDPSource: BEAUS Net Int’l Inv. Position to GDP-.07-.06-.05-.04-.03-.02-.01.00.01.02-.24-.20-.16-.12-.08-.04.00.04.08.121970 1975 1980 1985 1990 1995 2000 2005Current Accountto GDP Ratio(left scale)Net InternationalInvestment Positionto GDP ratio(right scale)Net Income-40000400080001200016000200002000 2001 2002 2003 2004 2005Dec. '05releaseMar. '06releaseInterest Rates01234567895 96 97 98 99 00 01 02 03 04 05IU S IG Y IU KUS 3 mo T -billGerman T-bill rateUK T -bill ratePolicy options• Dollar depreciation• Hoping for foreign growth• Banking on the Chinese• Monetary policy• Fiscal restraintDollar depreciation as panacea?-.06-.05-.04-.03-.02-.01.00.01.02-5.0-4.9-4.8-4.7-4.6-4.5-4.4-4.3-4.21975 1980 1985 1990 1995 2000US nominal trade balanceto GDP ratio (left axis)Log real dollarexchange rate(Fed, broad), laggedtwo years (right axis)Sources: BEA and FedThe import of fiscal policy• No other viable options (can’t bet on future revaluation shocks)• Stabilization of the CA is not the same as sustainability• Given US growth and investor preferences, govt debt accumulation pins down the CA over timeFiscal policy & and CA sustainabilitySource: CBO (Aug. 2005).24.28.32.36.40.44.48.521980 1985 1990 1995 2000 2005 2010 2015Debt to GDPRatio (Actualand Projected)TaxFixesIraqPhase-downDiscretionarySpendingForeign Holdings of Treasuries.0.1.2.3.476 78 80 82 84 86 88 90 92 94 96 98 00 02Foreign OfficialHoldingsForeignHoldingsTotal ForeignHoldingsTreasuries normalized by govt. debt held by publicSource: BEAImplications of fiscal restraintSource: Dalsgaard, André and Richardson (OECD WP #306, 2001)Global RebalancingGlobal RebalancingSource: UN ESCAP, Key Economic Developments and Prospects in the Asia-Pacific Region 2006 (Dec. 2005)Where does China fit in?Implications for Emerging Markets• As US interest rates rise, US growth falls• As US interest rates rise, asset prices in emerging markets fall• This could lead to financial crisesCapital Flows to Emerging Markets-50050100150200250-3 -2 -1 0 1 2 3 4 5 6US_TB3MSREAL(-1)EME_KA95KAFITNet Private Capital Flows toEmerging Markets (1995$)What Have Real Interest Rates Done Recently?-2-10123451990 1992 1994 1996 1998 2000 2002 20043 mo. T-billminus lagged3 mo.
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