international linkages and policy coordination cambridge endowment for research in finance...
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International International linkages and linkages and
policy policy coordinationcoordination
Cambridge Endowment for Research in Finance (CERF) Alphametrics Ltd.
The Cambridge Alphametrics Model
The Cambridge Alphametrics Model
LINK meeting November 2006
CERF and Alphametrics 2
What we can agree so farWhat we can agree so far
A short-term quarterly model such as LINK provides A short-term quarterly model such as LINK provides useful information about the current state of the world useful information about the current state of the world economyeconomy
Views on the merits of short-term policy-making depend Views on the merits of short-term policy-making depend on the intuition of the policy-maker and the perspective on the intuition of the policy-maker and the perspective of the beholder of the beholder
The time-scale for resolution of major imbalances is The time-scale for resolution of major imbalances is longer than the time-horizon of the modellonger than the time-horizon of the model
We need longer-term modelsWe need longer-term models
CERF and Alphametrics 3
What are the major What are the major imbalances in the global imbalances in the global economy ?economy ?
1. Income inequality1. Income inequality
2. The US deficit2. The US deficit
3. Pressure on the environment3. Pressure on the environment
CERF and Alphametrics 4
The Cambridge Alphametrics The Cambridge Alphametrics Model: central elementsModel: central elements
The objective is to provide a The objective is to provide a quantitative framework for scenarios of quantitative framework for scenarios of growth and income distribution that growth and income distribution that takes account of resource constraintstakes account of resource constraints
The target is to identify and measure The target is to identify and measure processes that change the structure of processes that change the structure of the world economy and economic the world economy and economic possibilities in each country and regionpossibilities in each country and region
CERF and Alphametrics 5
The Cambridge Alphametrics The Cambridge Alphametrics Model: understanding of the mid-Model: understanding of the mid-termterm
We need to understand historical We need to understand historical processes that have created major processes that have created major imbalances and get ideas about the imbalances and get ideas about the potential pay-off from different potential pay-off from different patterns of developmentpatterns of development
Without some degree of consensus it Without some degree of consensus it is difficult to imagine that global is difficult to imagine that global imbalances can be resolvedimbalances can be resolved
CERF and Alphametrics 7
Global inequality - incomeGlobal inequality - income
Countries in the top Countries in the top 20% measured by 20% measured by per capita income per capita income receive 60% of receive 60% of world incomeworld income
Those in the Those in the bottom 50% bottom 50% receive less than receive less than 20% of world 20% of world incomeincome
Distribution of world population and income by country, 2005
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0 10 20 30 40 50 60 70 80 90 100
Income Population
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……and exportsand exports
Countries in the Countries in the top 20% of the top 20% of the income distribution income distribution produce 75% of produce 75% of world exportsworld exports
Those in the Those in the bottom 50% bottom 50% produce 7% of produce 7% of world exportsworld exports
Distribution of world population, income and exports by country, 2005
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Income Exports Population
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Shares of the total value of world trade in goods and services, 1970-2005
Model #1 Trade and incomeModel #1 Trade and income
Export-led industrial Export-led industrial growth has made it growth has made it possible for many possible for many countries to take countries to take advantage of modern advantage of modern technology and exploit technology and exploit economies of scale economies of scale and specializationand specialization
Other countries that Other countries that rely on primary rely on primary products and energy products and energy had a more uneven had a more uneven experienceexperience
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1970 1975 1980 1985 1990 1995 2000 2005
Services
Manufactures
Energy
Primary products
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0
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100
1 2 3 4 5
Primary products
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1 2 3 4 5
Energy
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1 2 3 4 5
Manufactures
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1 2 3 4 5
Services
Ranges: <-7.5%, -7.5% to -2.5%, -2.5% to 2.5%, 2.5% to 7.5%, >7.5%
Trade balances by commodity Trade balances by commodity groupgroup
Market prices are Market prices are very important very important for exporters of for exporters of primary productsprimary products
Real demand is Real demand is more important more important for exports of for exports of manufactures manufactures and servicesand services
Percent of world population in countries with surpluses or deficits in the specified range
CERF and Alphametrics 11
9 market shares showing the largest absolute changes,
1970-2005
Changes in shares of Changes in shares of manufactured export marketsmanufactured export markets
Together with Together with historical and historical and cultural factors, cultural factors, policies on trade, policies on trade, investment, investment, taxation, taxation, education and education and infrastructure are infrastructure are more important more important than exchange than exchange ratesrates
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1970 1975 1980 1985 1990 1995 2000 2005
E Europe share in Fmr USSR
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1970 1975 1980 1985 1990 1995 2000 2005
Other Asia share in China
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1970 1975 1980 1985 1990 1995 2000 2005
W Europe share in E Europe
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1970 1975 1980 1985 1990 1995 2000 2005
Other Asia share in Other Asia
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1970 1975 1980 1985 1990 1995 2000 2005
W Europe share in Fmr USSR
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1970 1975 1980 1985 1990 1995 2000 2005
W Europe share in Africa
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1970 1975 1980 1985 1990 1995 2000 2005
China share in Japan
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1970 1975 1980 1985 1990 1995 2000 2005
Other Asia share in Japan
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1970 1975 1980 1985 1990 1995 2000 2005
USA share in Japan
CERF and Alphametrics 12
Model #2 The balance of Model #2 The balance of paymentspayments
-10
-5
0
5
10
1980 1985 1990 1995 2000
Germany
-10
-5
0
5
10
1980 1985 1990 1995 2000
UK
-10
-5
0
5
10
1980 1985 1990 1995 2000
Japan
-10
-5
0
5
10
1980 1985 1990 1995 2000
Mexico
-10
-5
0
5
10
1980 1985 1990 1995 2000
Brazil
-10
-5
0
5
10
1980 1985 1990 1995 2000
South Africa
-10
-5
0
5
10
1980 1985 1990 1995 2000
Indonesia
-10
-5
0
5
10
1980 1985 1990 1995 2000
China
-10
-5
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5
10
1980 1985 1990 1995 2000
India
structural flows
financial flows
change in reserves
balance of payments flows as % of GDPselected countries 1980 - 2004
structural flows structural flows include the include the current account current account and direct and direct investmentinvestment
the interesting the interesting question is the question is the impact on the impact on the exchange rateexchange rate
CERF and Alphametrics 13
real and nominal exchange rate changesselected countries 1980 - 2004
Exchange rate volatilityExchange rate volatility
-30
-20
-10
0
10
20
30
1980 1985 1990 1995 2000
Germany
-30
-20
-10
0
10
20
30
1980 1985 1990 1995 2000
UK
-30
-20
-10
0
10
20
30
1980 1985 1990 1995 2000
Japan
-30
-20
-10
0
10
20
30
1980 1985 1990 1995 2000
Mexico
-30
-20
-10
0
10
20
30
1980 1985 1990 1995 2000
Brazil
-30
-20
-10
0
10
20
30
1980 1985 1990 1995 2000
South Africa
-30
-20
-10
0
10
20
30
1980 1985 1990 1995 2000
Indonesia
-30
-20
-10
0
10
20
30
1980 1985 1990 1995 2000
China
-30
-20
-10
0
10
20
30
1980 1985 1990 1995 2000
India
nominal exchange rate
real exchange rate
real exchange real exchange rates have rates have been highly been highly volatile in volatile in nearly all nearly all countriescountries
there is zero there is zero correlation correlation between between financial flows financial flows and exchange and exchange ratesrates
CERF and Alphametrics 14
Model #3 Financial Model #3 Financial marketsmarkets
Movements in financial markets have important Movements in financial markets have important effects on investment and consumer spendingeffects on investment and consumer spending
Monetisation and financial liberalisation mean Monetisation and financial liberalisation mean that personal wealth is held in funds, equity, that personal wealth is held in funds, equity, bonds, bank deposits and real estatebonds, bank deposits and real estate
The market valuation of assets is relatively The market valuation of assets is relatively uncertain yet investors measure the benefits in uncertain yet investors measure the benefits in financial terms and such influence spendingfinancial terms and such influence spending
CERF and Alphametrics 16
An optimistic scenarioAn optimistic scenario
The best foundation for sustained growth and The best foundation for sustained growth and improved income distribution would be a consensus improved income distribution would be a consensus on a combination of policieson a combination of policies
Structural policies would include energy saving and Structural policies would include energy saving and accelerated relocation of production of tradeable accelerated relocation of production of tradeable goods and services to low income regions. The USA goods and services to low income regions. The USA may also need to take action to save energy and may also need to take action to save energy and build up export industriesbuild up export industries
Financial policies would include support for demand Financial policies would include support for demand expansion in developing regions and a less expansion in developing regions and a less conservative stance in Europeconservative stance in Europe
CERF and Alphametrics 17
Sustainable reflationSustainable reflation
W Europe and W Europe and Asian countries Asian countries can bring about a can bring about a reduction of the reduction of the US trade deficit by US trade deficit by relying more on relying more on domestic spending domestic spending and cutting their and cutting their combined trade combined trade surplussurplus
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1990 2000 2010
Rest of Asia
Rest ofworld
China
Japan
Trade surplus ($billion)
CERF and Alphametrics 18
Energy efficiency would Energy efficiency would be a must and is possiblebe a must and is possible
Energy saving Energy saving will reduce will reduce damage to the damage to the environment environment and facilitate a and facilitate a more balanced more balanced pattern of tradepattern of trade
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100
200
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1990 2000 2010
Rest of Asia
China
Japan
Energy consumption (tons of oil per million $ income)
CERF and Alphametrics 19
Growth generalizedGrowth generalized
AfricaAfrica 6.1%6.1%
Middle EastMiddle East 5.1%5.1%
Former USSRFormer USSR 7.1%7.1%
Eastern EuropeEastern Europe 5.5%5.5%
Western EuropeWestern Europe 2.7%2.7%
USAUSA 2.2%2.2%
Other DevOther Dev 3.0%3.0%
ChinaChina 7.6%7.6%
Other AsiaOther Asia 7.3%7.3%
Latin AmericaLatin America 6.0%6.0%
Per capita income, 2007 - 2015