Key International Macroeconomic Issues Instructor Menzie Chinn Economics 302 Spring 2006 Net Exports GDP 04 X G D P n o n o il 02 00 02 X G D P 04 06 08 1970 1975 1980 1985 1990 1995 2000 2005 E XP G S IM P G S G D P E XP G S IM P G S N O P E T G D P Source BEA Net Exports and Dollar Value 02 01 150 X G D P left scale 140 00 130 01 120 02 110 03 100 04 90 05 06 07 1975 F e d b ro a d tw xr C P I right scale 80 70 60 1980 NX GDP 1985 1990 1995 2000 2005 DO LLARVALUE FEDM AJO RREAL The current acct budget deficit 04 02 CA GDP 00 02 04 BuS GDP 06 08 1975 1980 1985 1990 1995 2000 Source BEA US Net Int l Inv Position to GDP 02 12 01 08 00 04 01 00 02 03 04 08 12 Net International Investment Position to GDP ratio right scale 05 06 07 1970 04 Current Account to GDP Ratio left scale 1975 1980 1985 1990 1995 16 20 2000 24 2005 Net Income 20000 Dec 05 release 16000 12000 8000 Mar 06 release 4000 0 4000 2000 2001 2002 2003 2004 2005 Interest Rates 8 U K T b ill ra te 7 6 5 4 3 G e rm a n T b ill ra te 2 1 U S 3 m o T b ill 0 95 96 97 98 IU S 99 00 01 IG Y 02 03 IU K 04 05 Policy options Dollar depreciation Hoping for foreign growth Banking on the Chinese Monetary policy Fiscal restraint Dollar depreciation as panacea 02 01 4 2 U S nominal trade balance to G D P ratio left axis 4 3 00 4 4 01 4 5 02 4 6 03 4 7 04 05 06 1975 Log real dollar exchange rate Fed broad lagged tw o years right axis 4 8 4 9 5 0 1980 1985 1990 1995 2000 Sources BEA and Fed The 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 time Fiscal policy and CA sustainability 52 D is c retionary S p e n d in g 48 T ax F ixe s 44 40 D e b t to G D P R a tio Ac tu a l a n d P ro je c te d 36 32 Ira q P hasedow n 28 24 1980 1985 1990 1995 2000 2005 2010 2015 Source CBO Aug 2005 Foreign Holdings of Treasuries 4 T otal F oreign H o ld in g s 3 F o re ig n H oldings 2 1 F o re ig n O fficial H o ld in g s 0 76 78 80 82 84 86 88 90 92 94 96 98 00 02 Treasuries normalized by govt debt held by public Source BEA Implications of fiscal restraint Source Dalsgaard Andr and Richardson OECD WP 306 2001 Global Rebalancing Global Rebalancing Source 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 crises Capital Flows to Emerging Markets Net Private Capital Flows to Emerging Markets 1995 250 200 150 100 EME KA95 KAFIT 50 0 50 3 2 1 0 1 2 3 US TB3MSREAL 1 4 5 6 What Have Real Interest Rates Done Recently 5 Mexico 3 mo T bill minus lagged 3 mo Core inflation 4 3 2 1 0 1 Thailand 2 1990 1992 1994 1996 1998 2000 2002 2004
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