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EC201 - MACRO TERM 1 > TERM 1 : Global imbalances > Flashcards

TERM 1 : Global imbalances Flashcards

1
Q

TRADE BALANCE =

A

GOODS BALANCE + SERVICES BALANCE

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2
Q

WHAT 2 THINGS COMPRISE INCOME BALANCE

A
  1. NET INVESTMENT INCOME FROM K

2. NET INTERNATIONAL PAYMENTS TO EMPLOYEES

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3
Q

WHAT ARE NET UNILATERAL TRANSFERS?

A

GIFTS FROM PRIVATE AGENTS / GOV AID FROM ROW - GIFTS TO ROW

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4
Q

WHAT 3 THINGS FORMS CURRENT ACCOUNT

A
  1. TRADE BALANCE
  2. INCOME BALANCE
  3. NET UNILATERAL TRANSFERS
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5
Q

what happens to net external debt if CA<0?

A

Increases

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6
Q

What happens to net external debt if CA>0?

A

decreases

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7
Q

how do CA and TB relate?

A

CA & TB move in tandem if look at country cross-sectional data at one point in time, but some exceptions

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8
Q

What is Ireland’s ca & tb like? what does it imply?

A

VERY POS TB, BUT -VE CA = INCOME BALANCE MUST BE V. NEGATIVE

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9
Q

How to CA across the world relate?

A

CA US + CA ROW = 0

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10
Q

WHAT IS THE NIIP? FORMULA?

A

difference between a country’s foreign owned assets & it’s foreign liabilities.

NIIP = US owned foreign assets - foreign owned US assets

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11
Q

NIIP < 0 means

A

assets < liabilities –> net debtor

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12
Q

NIIP > 0 means

A

assets > liabilities –> net creditor

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13
Q

Changes in NIIP due to (2)

A
  1. current account

2. valuation changes

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14
Q

HOW DOES CA AFFECT NIIP

A

CA<0 NIIP FALLS

CA>0 NIIP RISES

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15
Q

DEFINE VALUATION CHANGES

A

changes in the market value of a country’s asset and liability portfolio

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16
Q

When are valuation changes significant

A

If country has a large asset/liability portfolio

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17
Q

What country has benefitted from valuation changes?

A

US has benefitted from +VE changes - without them external debt would be even larger.

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18
Q

How to reduce net external debt i.e. increase NIIP (2)

A
  1. Dollar depreciation - value of liabilities in $ falls relative to value of assets which are in foreign currency
  2. Stock market gains
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19
Q

What is the NIIP NII paradox?

A

US has positive NIIP

But negative NII

20
Q

What is NII?

A

Net investment income

income receipts on US owned foreign assets - income payments on foreign owned US assets

21
Q

How do NIIP and NII relate?

A

NII = the return on TNIIP

22
Q

2 explanations for NIIP NII paradox

A
  1. Dark matter - true NIIP ≠ NIIP

2. Return differential - rA ≠ rL

23
Q

Why is there a return differential for US NIIP?

A

US owned foreign assets = risky, high return
Foreign owned US assets = safer, lower return
rA > rL –> NII > 0

24
Q

A country CANNOT run a perpetual TB deficit if

A

NIIP < 0 i.e. net debtor

Need a TB surplus at some point to service its debt

25
Q

A country CAN run a perpetual TB deficit if

A

NIIP > 0 i.e. net creditor

Can run TB deficits and finance by the interest from net investments abroad

26
Q

NIIP end of period 1 for TB deficit analysis

A

B1* = (1+r)B0* + TB1

27
Q

NIIP end of period 2 for TB deficit analysis

A

B2* = (1+r)B1* + TB2

28
Q

Condition on B2* and why?

A

B2*=0

Cannot hold any debt or assets at end of period 2 as everyone dies so no one willing to lend.

29
Q

Equation for can run TB deficit & explain

A

(1+r)B0* = -TB1 - TB2/(1+r)
net foreign asset position including interest = present discounted value of all future trade deficits
- If B0<0 net debtor, need TB>0 at some point for equation to hold
- If B0>0 net creditor, TB1 and TB2 < 0 and equation holds

30
Q

Can run a perpetual CA deficit? what condition

A

Bo*=-CA1 - CA2

- If B0*>0, Ca1<0 and ca2<0

31
Q

Savings, investment, CA identity. explain.

A

CA1 = S1 - I1

If savings > what is needed to finance domestic investment, rest goes abroad to purchase foreign assets therefore CA +VE

32
Q

AS-AD formula

A

Q1 + IM1 = C1 + G1 + I1 + X1

33
Q

CA formula

A

CA1 = rB0* + TB1

34
Q

Again how does CA relate to NIIP if valuation changes =0?

A

CA = change in the NIIP

  • CA = yearly change
  • NIIP = cumulative position across all years
35
Q

National savings formula

A

S1 = Y - C1 - G1

36
Q

Initial NIIP formula in infinite horizon economy

A

B0=BT/(1+r)^T - TB1/(1+r) - TB2/(1+r)^2-…-TBT/(1+r)^T

37
Q

What is the no ponzi game constraint infinite horizon economy?

A

Lim T–> infinity BT*/(1+r)^T >=0

38
Q

What is the transversatility/optimality condition infinite horizon economy?

A

Lim T–> infinity BT*/(1+r)^T <=0

39
Q

What does this mean for the initial NIIP formula infinite horizon economy?

A

BT*/(1+r)^T = 0

So B0* = -TB1/(1+r) - TB2/(1+r)^2 -…-TBT/(1+r)^T

40
Q

Can a country run a perpetual TB deficit in infinite horizon economy?

A

If B0*<0 net debtor, need TB>0 at some point so NO!

41
Q

Law of motion for Bt*

A

Bt* = (1+r)Bt-1* + TBt

42
Q

Formula for TBt given that we assume each period a country runs TB surpluses and pays a fraction of its IR obligations. Subsequent formula for Bt*

A 
TBt= -alpha rBt-1*
Bt* = (1 + r - alpha r)Bt-1*
43
Q

Law of motion for CAt

A

CAt = rBt-1* + TBt

44
Q

Formula for CAt in infinite horizon pay fraction of interest setting

A

CAt = r(1-alpha)Bt-1* (<0)

45
Q

Does it satisfy transversality & no-ponzi condition infinite horizon CA

A

Bt/(1+r)^t = ((1 + r - alpha.r)/(1+r))^t B0
As t–> infinity, converges to zero since denom>numer
So YES!

46
Q

Evolution of TBt infinite horizon in terms of alpha, r and B0* & explain

A

TBt= -alpha.r(1 + r(1 - alpha))^t-1 B0*
To sustain TB surpluses growing at rate r(1 - alpha)
Need GDP growth >= r(1 - alpha)
Since if exporting everything & IM=0, need production to rise for TB to grow unboundedly.
If so, this repayment plan works even if B0*<0

EC201 - MACRO TERM 1 (9 decks)

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