Capital inflows and booms in asset prices: Going beyond the current account
Eduardo Olaberría, 7 December 2013
Policymakers have long been concerned that large capital inflows are associated with asset-price booms. This column presents recent research showing that the composition of capital inflows also matters. The association between capital inflows and asset-price booms is about twice as strong for debt-related than for equity-related investment. Policymakers should therefore pay attention to the composition of capital inflows, since debt-related inflows may still undermine financial stability even if they do not result in an overall current-account deficit.
For decades, policymakers’ perception has been that large capital inflows can fuel booms in asset prices. If this were true, bonanzas in capital inflows would imply an important risk to financial stability, since booms in asset prices are leading indicators of financial crises.
Topics: Financial markets, International finance
Tags: asset prices, booms, bubbles, capital flows, Capital inflows, current account
China’s strong domestic demand has reduced its trade surplus
Françoise Lemoine, Deniz Ünal, 19 July 2012
Since 2008 China’s trade surplus has fallen sharply. This column argues that China has since become a major source of international demand, thanks to its strong economic growth. China’s import demand has been aimed at resource-rich countries and at its Asian neighbours, but also at European exporters, especially in high-end consumer goods.
Between 2005 and 2007 China’s accumulated huge trade surpluses and played a major part in the rise of global imbalances. The US and China have repeatedly come in conflict over the imbalance in bilateral trade.
Topics: Global economy, International trade
Tags: China, current account, global imbalances
Sudden stops in the Eurozone
Jean Pisani-Ferry, Silvia Merler, 2 April 2012
Many analysts and observers have put forward that the euro crisis is a balance-of-payments crisis at least as much as a fiscal crisis. This column provides evidence of capital-flow reversals in Greece, Ireland, Portugal, Spain, and Italy. It argues that the fostering of a pan-European banking industry and the creation of a banking union with centralised supervision and access to resources to recapitalise weak financial institutions should feature high on the policy agenda.
Many analysts and observers have put forward that the euro crisis is a balance-of-payments crisis at least as much as a fiscal crisis (e.g. Carney 2012, Giavazzi and Spaventa 2011, Sinn 2012, Wolf 2011).
Topics: EU policies
Tags: balance of payments, capital flows, current account, sudden stops
The global financial crisis – What caused the build-up?
Erlend W Nier, Ouarda Merrouche, 25 March 2012
Five years into the global crisis there is still little agreement on its root causes. Had central banks kept policy rates too low for too long? Or were rising global imbalances the underlying cause of the crisis? This column suggests that the strength of net capital inflows, rather than the monetary-policy stance, emerges as the key determinant of differences in the growth of financial imbalances across OECD countries over the pre-crisis period.
With all eyes currently on the latest twists being played out in the Eurozone, the global financial crisis, now in its fifth year, appears alive and well. But there is still little agreement on the underlying macroeconomic causes of the build-up of financial imbalances that unwound so dramatically since the summer of the 2007.
Topics: International finance, Macroeconomic policy
Tags: current account, global crisis, monetary policy
The growth effect of current-account reversals
Luiz de Mello, Pier Carlo Padoan, Linda Rousová, 18 June 2011
For developing and emerging economies, current-account reversals are rarely welcome news. Often they lead to financial ruin and political turmoil. This column explores what current-account reversals mean for the long run. It argues that they can cause structural breaks in trend GDP growth, rather than short-lived deviations.
Current-account reversals are often disruptive to short-run growth, at least in developing and emerging-market economies (see on this site Abiad et al. 2010 and Böwer et al. 2010).
Tags: current account, emerging economies, growth
Fiscal policy and the current account
S. M. Ali Abbas, Jacques Bouhga-Hagbe, Antonio Fatás, Paolo Mauro, Ricardo Cicchelli Velloso, 16 September 2010
What impact will fiscal policy have on current-account imbalances in the years to come? Using data from a large and diverse panel of countries, this column finds that a strengthening in the fiscal balance by 1 percentage point of GDP is, on average, associated with a current-account improvement of 0.2-0.3 percentage points of GDP.
Today, as in the 1980s, government deficits and trade deficits are growing in tandem in some nations while government surpluses and trade surpluses are growing in others.
Topics: Global economy, Macroeconomic policy
Tags: current account, fiscal policy, imbalances
The $2 trillion dollar question: How about US demand and output?
Giancarlo Corsetti, Panagiotis Th. Konstantinou, 18 February 2009
The US net international investment position declined by an astounding magnitude in 2008. Does that imply a massive contraction in US consumption? This column provides empirical evidence that large swings in the US current account are driven by transitory shocks that don’t significantly alter consumption.
Topics: International finance
Tags: consumption, current account, temporary shocks, US net international investment position
Does exchange rate flexibility speed up current account adjustment?
Menzie D. Chinn , Shang-Jin Wei, 1 December 2008
This column examines whether the pace at which a country’s current account balance adjusts to its average value depends upon the exchange rate regime. The benefits of exchange rate flexibility for current account adjustment are found to be greatly exaggerated. By some measures, a fixed exchange rate facilitates faster adjustment.
“We also agreed that an orderly unwinding of global imbalances, while sustaining global growth, is a shared responsibility involving... greater exchange rate flexibility...”
G20 Communiqué, Meeting of Finance Ministers and Central Bank Governors, Cape Town, South Africa, November 17-18, 2007.
Topics: Exchange rates
Tags: current account, exchange rate regime
How do capital gains affect long run-current accounts?
Cédric Tille, 11 October 2008
There has been a lively debate over the sustainability of global imbalances in recent years. This column argues that capital gains on international assets and liabilities are an important ingredient in any assessment of the sustainability of global imbalances.
The debate on the sustainability, or lack thereof, of global imbalances has kept policymakers and international economists busy for several years.
Topics: International finance
Tags: capital gains, current account, financial globalisation, international imbalances