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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Slides for Chapter 1
Global Imbalances
Columbia University
March 3, 2020
1
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Motivation
Countries trade a lot with one another, and the United States is no
exception. This fact elicits a number of questions, such as
• How big are international transactions in goods, services, and fi-
nancial assets for the United States and other countries?
• Does the United States have a trade deficit or a trade surplus
with the rest of the world? What about China, Europe, and Latin
America?
• Is the United States an external debtor or an external creditor?
• How have the trade balance and the international asset position
of the United States and other countries evolved over time?
This chapter addresses these and other related questions.
2
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Overview
The main focus of the present chapter is descriptive. In later chap-
ters, we will ask more positive questions such as
• Why are exports of goods and services larger or smaller than im-
ports of goods and services?
• Why do countries borrow from abroad?
• Can countries borrow forever?
• What determines the size of a country’s external debt?
3
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The Geography of External Debt
Take a look at the heat map in slide 5. It displays with colors
the accumulated current accounts between 1980 and 2017. We
will define it more precisely, but roughly speaking, a country’s e
current account is the difference between exports and imports of
gods and services plus the difference between international receipts
and payment of interest, dividends, profits, etc. The map shows that
the country with the biggest accumulated current account deficit
(brightest red) is the United States. The countries that have been
financing these deficits (deepest green) are Japan, China, Germany,
and oil and gas exporting countries (members of OPEC, Russia, and
Norway).
Overall, the picture is one of unbalanced accumulated international
trade, with some countries running protracted current account deficits
and others running protracted surpluses. If all countries were in bal-
ance, the map would look pastel white. Instead, it looks mostly ei-
ther flaming red or dark green, reflecting large global imbalances.
4
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Cumulative Current Account Balances Around the World
1980-2017, in billions of U.S. dollars
Notes. The map shows for each country the sum of current account balances in billions of U.S. dollars between 1980 and 2017. The data source is Philip R. Lane andGian Maria Milesi-Ferretti (2017), “International Financial Integration in the Aftermath of the Global Financial Crisis,” IMF Working Paper 17/115. Data for formerSoviet Union countries start in 1992. Countries for which no data are available appear in gray. Country names are displayed for the countries with the top 10 largestcumulated current account surpluses and deficits.
5
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The International Transactions Accounts
In the United States, international transactions are recorded by the
Bureau of Economic Analysis (www.bea.gov) in the International
Transactions Accounts (ITA), also known as the Balance of Pay-
ments.
The balance of payments has three components:
1. current account
2. financial account
3. capital account (quantitatively unimportant)
In the following slides we will introduce each component.
6
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The current account is the sum of three accounts:
current account = trade balance +
income balance +
net unilateral transfers
7
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
1. The Current Accounta. The Trade Balance
An important figure produced in the ITA is the Trade Balance,
which measures the difference between exports of goods and services
and imports of goods and services:
Merchandise Trade Balance = Exports of Goods − Imports of Goods
Service Balance = Exports of Services − Import of Services
Trade Balance = Goods Balance + Service Balance
Examples of traded goods: textiles, oil, cars, and wheat.
Examples of traded services: education, medical care, and consult-
ing.
8
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The U.S. Trade Balance in 2016
Exports of goods and services: $2.2 trillion
Imports of goods and services: $2.7 trillion
Trade balance = $2.2-$2.7 = -$0.5 trillion
Is $0.5 trillion a big or small number?
Let’s relate it to the size of the U.S. economy. In 2016, GDP was
$18.6 trillion. Letting TB denote the trade balance, we have
TB2016
GDP2016= −
0.5
18.6= −0.027
or the 2016 trade deficit was 2.7 percent of GDP. Now is this a
small or a big number? Shortly, we will see how the accumulation of
trade deficits of this magnitude has turned the United States from
a creditor to the world’s largest debtor.
9
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The U.S. Trade Balance Over Time
Is the size of the trade deficit in 2018 typical for the United States?
Look at the graphs in slides 11 and 12, showing the trade balance
since 1960, both in nominal terms and as a fraction of GDP.
The trade balance was practically nil between 1960 and the early
1980s. Since then, trade deficits grew steadily, reaching almost 6
percent of GDP just before the beginning of the Great Recession of
2007-2009. That recession was associated with an improvement in
the trade balance to around 3 percent, which has persisted to the
present.
10
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The U.S. Trade Balance Over Time: 1960-2016
(in billions of dollars)
1960 1970 1980 1990 2000 2010−800
−700
−600
−500
−400
−300
−200
−100
0
100
Year
Bill
ions o
f dolla
rs
Data Source: BEA, bea.gov, ITA, Table 1.1. (December 19, 2017 release).
11
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The U.S. Trade Balance as a Share of GDP: 1960-2016(in percent of GDP)
1960 1970 1980 1990 2000 2010−6
−5
−4
−3
−2
−1
0
1
2
Year
Perc
ent of G
DP
Data Source: BEA, bea.gov. TB data: ITA, Table 1.1. (December 19, 2017 release). GDP data:NIPA Table 1.1.5. (December 21, 2017 release).
12
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The Income Balance
Another item of the Balance of Payments is the Income Balance,
which measures the difference between incomes received from the
rest of the world and incomes paid to the rest of the world. These net
income payments are recorded separately for capital and labor. Net
income from capital is called Net Investment Income and consists
of payments such as dividends, interest, and profits. Net income
from labor is called Net International Payments to Employees
and records earnings of U.S. residents temporarily employed abroad
and compensation payments to foreigners temporarily working in the
U.S. So we have that
Income Balance = Net Investment Income
+ Net International Payments To Employees
13
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Net Unilateral Transfers
A third item in the Balance of Payments is Net Unilateral Trans-
fers, which keeps record of the difference between gifts received
from the rest of the world and gifts given to the rest of the world.
These gifts can involve private agents or governments:
Net Unilateral Transfers = Private Remittances
+ Government Transfers
14
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The Current Account
The Current Account is the sum of the Trade Balance, the Income
Balance, and Net Unilateral Transfers:
Current Account = Trade Balance +
Income Balance +
Net Unilateral Transfers
The current account is an important concept because if the current
account is negative, all other things equal, the net external debt
of the country goes up, and if the current account is positive, the
external debt falls.
The table in slide 16 displays the values of the different components
of the Balance of Payments in the United States in 2016.
15
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The Current Account of the United States in 2018
Billions PercentageItem of dollars of GDP
Current Account -488.5 -2.4Trade Balance -622.1 -3.0Balance on Goods -891.3 -4.3Balance on Services 269.2 1.3Income Balance 244.3 1.2Net Investment Income 258.1 1.3Compensation of Employees -13.8 -0.1Net Unilateral Transfers -110.7 -0.5Private Transfers -94.4 -0.5U.S. Government Transfers -16.2 -0.1
Data Source: Authors’ calculations based on data from ITA Tables 1.1 and 5.1. and NIPA Table1.1.5. of the Bureau of Economic Analysis.
16
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Observations on the U.S. 2016 Balance of Payments
• In 2018, the United States ran a large current account deficit.
• The bulk of the current account deficit is accounted for by a large
trade balance deficit. The United States imports mostly low-tech
manufactured goods (textiles, electronics, etc.) and exports human-
capital-intensive services (higher education, R&D, health care, pro-
fessional consulting). Thus, the United States typically runs a trade
deficit in goods and a trade surplus in services.
• Net investment income is positive, which means that investments
of U.S. residents in foreign assets paid more in interest, dividends,
profits, than the investments of foreign residents in U.S. assets. Net
International Payments to Employees was negative but small.
• Net Unilateral Transfers were negative, which means that the
United States gave more gifts to the rest of the world than it re-
ceived. These gifts are mostly remittances of immigrants in the U.S.
to relatives living abroad.
17
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
In the United States, the Trade Balance and theCurrent Account Move in Tandem Over Time
We saw in the previous table that for the year 2018, the bulk of the
U.S. current account is the trade balance. The figures in slides 19
and 20 show that this is indeed true pretty much all the time.
18
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The U.S. Trade Balance and Current Account, 1960-2018
(in billions of dollars)
1960 1970 1980 1990 2000 2010−900
−800
−700
−600
−500
−400
−300
−200
−100
0
100
Year
Bill
ion
s o
f d
olla
rs
TB
CA
Data Sources: BEA, bea.gov, ITA, Table 1.1. (December 19, 2017 release).
19
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The U.S. Trade Balance and Current Account, 1960-2018
(in percent of GDP)
1960 1970 1980 1990 2000 2010 2020−6
−5
−4
−3
−2
−1
0
1
2P
erc
ent of G
DP
Year
TB/GDP
CA/GDP
20
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The Trade Balance and the Current Account Also Often Move
in Tandem Across Countries
The following figure shows the current account (vertical axis) and
the trade balance (horizontal axis) as percentages of GDP for 88
countries in 2016. Each dot is one country.
The fact that most dots lie close to the 45-degree line indicates that
the trade balance and the current account comove closely across
countries. Countries with large trade balances tend to be countries
with large current account balances, and countries with small trade
balances tend to have small current account balances.
21
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Trade Balances and Current Account Balances Across Coun-
tries in 2016
−10 −8 −6 −4 −2 0 2 4 6 8 10−10
−8
−6
−4
−2
0
2
4
6
8
10
China
MexicoIndonesia
Guatemala
Germany
USA
45o
100 × TB/GDP
100 ×
CA
/GD
P
Notes. TB denotes the trade balance andCA denotes the current account balance.The data source is World DevelopmentIndicators (WDI). There are 88 countriesincluded in the figure. Countries in theWDI database with trade balances or cur-rent account balances in excess of ± 10percent of GDP were excluded.
22
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The previous figure also shows that the current account and the
trade balance need not both have the same sign (as it is the case in
the United States) and that the current account can be either larger
or smaller than the trade balance. Any sign pattern is possible, as
shown in the following table.
23
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Trade Balance and Current Account as Percentages of GDP
in 2016 for Selected Countries
Country TB/GDP CA/GDP
China 2.2 1.8Germany 8.0 8.3Guatemala -7.8 1.5United States -2.7 -2.4Mexico -1.8 -2.2Indonesia 0.8 -1.8
Notes. TB denotes trade balance and CA denotes current account. Data Source. World Development Indicators, available online at databank.worldbank.org.
24
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
CA = TB + Income Balance + Net Unilateral Transfers
Germany:CA
GDP > TBGDP > 0 because Income Balance > 0. Germany is a net
creditor, so it receives interest income from the rest of the world.
Indonesia:TBGDP > 0 > CA
GDP because Income Balance < 0. Indonesia is a net
debtor, so it makes interest payments to the rest of the world.
Guatemala:TBGDP
< 0 < CAGDP
because Net Unilateral Transfers > 0. Guata-
malans working in the United States and elsewhere are sending
money home, resulting in Personal Remittances of about 10% of
GDP.
25
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Who Trades With The United States?
The next figure shows that a sizable fraction of the U.S. merchandise
trade deficit is accounted for by its trade with China.
The fraction of the U.S. merchandise trade deficit accounted for by
deficits with China has increased steadily since China’s accession to
the WTO in 2001 from about 20 percent in the 1990s to close to
50 percent by 2016.
26
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Figure 1.4: The U.S. Merchandise Trade Balance with China
1960 1970 1980 1990 2000 2010 2020−900
−800
−700
−600
−500
−400
−300
−200
−100
0
100
Year
Bill
ions o
f dolla
rs
Total
with China
Notes. The data source for the U.S. merchandise trade balance is U.S. International Transactions, Table 1.1. The data source for the bilateral merchandise tradebalance between the United States and China is the OECD, http://stats.oecd.org for the period 1990 to 2002 and U.S. International Transactions, Table 1.3 for theperiod 2003 to 2016. The vertical line marks the year 2001 when China became a member of the World Trade Organization.
27
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The World Map of Current Account Balances
If the United States is running a large current account deficit, some
other countries must be running current account surpluses. Why?
Because it must be the case that:
CAUS + CAROW = 0,
where ROW stands for rest of the world.
So who is running big current account surpluses? Look again at the
heat map in slide 5.
28
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The Net International Investment Position (NIIP )
A country’s Net International Investment Position (NIIP ) is the dif-
ference between its foreign asset position (A) and its foreign liability
position (L)
NIIP = A − L
If the NIIP is negative, then the country has an external debt, and
if the NIIP is positive, the country is a net creditor of the rest of
the world.
29
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
• Look at the figure in slide 31 . It shows the U.S. current account
(CA) for the period 1960 to 2018 and the U.S. net international
investment position (NIIP) for the period 1976 to 2018, both in
percent of GDP.
• The NIIP was positive at the beginning of the sample (1976).
• The large CA deficits of the 1980s brought the NIIP to negative
territory.
• Even larger CA deficits occurred during the 1990s, and the United
States ended that decade as the world’s largest external debtor.
• The CA deficits continued to increase until the onset of the Global
Financial Crisis (GFC) in 2007, reaching 6% of GDP.
• During the GFC, the CA deficits became smaller, but still sizable
at around 2.5% of GDP.
• By the end of 2018, the NIIP stood at -9.6 trillion dollars or -47
percent of GDP.
• A natural question (addressed in Chap. 2) is whether the U.S. CA
deficits are sustainable over time.
30
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The U.S. Current Account and Net InternationalInvestment Position
1960 1970 1980 1990 2000 2010 2020−60
−40
−20
0
20
Year
NII
P,
pe
rce
nt
of
GD
P
1960 1970 1980 1990 2000 2010 2020−6
−4
−2
0
2
CA
, p
erc
en
t o
f G
DP
NIIP/GDP
CA/GDP
Notes. CA, NIIP , and GDP stand for current account, net international investment position, andgross domestic product, respectively. The sample period for CA is 1960 to 2018 and for NIIP1976 to 2018.
31
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The Net International Investment Position (NIIP ) changes for two
reasons
∆NIIP = CA + valuation changes
where
CA= The Current Account
Valuation Changes= changes in the market value of the country’s
foreign asset and liability positions (due to currency appreciations or
depreciations, changes in stock prices, etc.)
32
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
We already looked at the U.S. current account data (slides 19 and
20). We saw that the current account has been in deficit since the
early 1980s. These current account deficits certainly contributed to
the deterioration of the NIIP .
Next let’s look at the second component, Valuation Changes.
The following example illustrates how valuation changes can have
significant effects on the size and even the sign of the NIIP.
33
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Example
• International assets (A): 25 shares in Italian carmaker Fiat. The
price of each share is 2 euros. The exchange rate is 2 dollars per
euro. Then
A = 25 × 2 × 2 = 100 dollars.
• International liabilities (L): 80 U.S. bonds held by foreigners. Price
1 dollar per unit. Then
L = 80 × 1 = 80
• NIIP = A − L = 100− 80 = 20
• Depreciation of the euro: Now the exchange rate is 1 dollar per
euro. Then,
• A = 25 × 2 × 1 = 50
• L unchanged (sinse U.S. bods denominated in dollars)
• NIIP = A − L = 50 − 80 = −30.
• Conclusion: Just because of a change in the exchange rate, the
country went from being a creditor to being a debtor of the rest of
the world.
34
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Example (cont.)
Suppose that the price of the Fiat share jumps to 7 euros. Then
• A = 25 × 7 × 1 = 175
• L unchanged.
• NIIP = A − L = 175 − 80 = 95 • A change in stockprices has an
effect on the country’s NIIP. In this example, the country went from
being a net debtor to being a net creditor.
• Conclusion: The above hypothetical examples illustrate how
a country’s net international investment position can display large
swings because of movements in asset prices or exchange rates. This
is indeed the case in actual data as well, as we’ll see next.
35
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The Importance of Valuation Changes
Look at the figure in slide 37, which plots realized valuation changes
since 1976. It shows that
• Valuation changes can be large. We have observed valuations
changes as large as ±15 percent of GDP.
• large valuation changes are a recent phenomenon. Until the year
2003, the typical valuation change was ±3 percent of GDP.
• the United States experienced valuation gains more often than
valuation losses, 24 versus 16 times.
36
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Figure 1.6: Valuation Changes as Share of GDP, 1977-2016
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020−15
−10
−5
0
5
10
15
Year
Pe
rce
nt
of
GD
P
37
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Valuation Changes Before and After theGlobal Financial Crisis (2007 to 2012)
• From 2002 to 2007, the U.S. cummulative CA deficit was 3.9
trillion (32% of GD)).
• Yet, the NIIP improved by 80 billion.
• This means that valuation changes during this period amounted
to more than 4 trillion. This is how:
(1) The dollar depreciated by 20%. This cause large positive val-
uation changes because U.S. assets are mostly in foreign currency,
whereas its liabilities are mostly in dollars.
(2) the stock markets in foreign countries significantly outperformed
the U.S. stock market: cummulative return from 2002 to 2007,
190% aborad and 90% in the United States. As a result, the U.S.
net equity position went from virtually nothing to 3 trillion.
• This came to a sudden stop in 2008 (look at the figure in slide 37):
that year, valuation changes were -15% of GDP, mostly from an
enormous drop in foreign stock markets.
38
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Observations on the figure
Points above the 45-degree line correspond to years with positive
valuation changes and points below the 45-degree line to negative
valuation changes. 24 observations are above the 45-degree line and
16 are below.
If valuation changes were quantitatively unimportant, most observa-
tions should lie in a narrow corridor around the 45-degree line. The
graph shows that this is not the case. On the contrary, deviations
from the 45-degree line are both frequent and large. The largest
valuation changes (positive or negative) occurred after 2000 (red
dots).
39
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
A Hypothetical NIIP Without Valuation Changes
The figure in slide 41 answers this question. It plots the actual
U.S. NIIP and a hypothetical NIIP constructed by removing valu-
ation changes from the actual NIIP .
To construct the hypothetical NIIP for a given year, start with the
NIIP of the initial year, NIIP1976, and add all of the CA balances
from 1977 until the year of interest. For example, for 2016, the
hypothetical NIIP is given by
hypothetical NIIP2016 = NIIP1976+CA1977+CA1978+· · ·+CA2016
The figure in slide 41 plots the actual and hypothetical net interna-
tional investment positions over the period 1976 to 2018 in percent
of GDP.
40
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Figure 1.8: Actual and Hypothetical U.S. NIIPs: 1976 to 2016
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020−12
−10
−8
−6
−4
−2
0
2
Year
Trilli
ons o
f dolla
rs
Actual NIIP
Hypothetical NIIP
Notes. The hypothetical NIIP for a given year is computed as the sum of the NIIP in 1976 and the cumulative sum of current account balances from 1977 to theyear in question. Source. Own calculations based on data from the Bureau of Economic Analysis.
41
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Observations on the Hypothetical NIIP
• Until 2002, the actual and hypothetical NIIP were not significantly
different from each other ⇒ valuation changes were not sizable.
• In 2002 the hypothetical NIIP s starts to at a much faster pace
than the actual NIIP⇒ large positive valuation changes.
• Without this lucky strike, the NIIP in 2007 would have been -46%
of GDP instead of the actual -9 percent.
• The reversal of fortune in the GFC broght the actual and hypo-
thetical NIIP almost as close to each other as before 2002.
42
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
One reason why have valuation changes become so large is
that Gross Positions Have Exploded since the 2000s
Take a look at the figure in the next slide
Why?
• Suppose in country x A = L = 1 and in country y A = L = 1000.
• Suppose GDP is 100 in both countries.
• Then, in both countries NIIP = 0% of GDP.
• Suppose the value of assets increases by 1% in both countries.
• This causes the NIIP to go from 0 to 0.1 in country x, and from
0 to 100 in country y. Thus, the NIIP increases by 0.1% of GDP in
country x and by 100% of GDP in country y.
43
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Figure 1.7: U.S.-Owned Assets Abroad and Foreign-Owned Assets in the U.S.
1975 1980 1985 1990 1995 2000 2005 2010 2015 20200
20
40
60
80
100
120
140
160
180
200
Perc
ent of U
.S. G
DP
Year
U.S.−owned assets abroad
Foreign−owned assets in the United States
44
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
1.7 The Negative-NIIP-Positive-NII Paradox
45
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Suppose you had a negative balance on your credit card. Would you
expect to receive interest payments from your credit card company
or to have to make payments to your credit card company? Probably
the latter.
Well, that is not what happens with the United States. Look at the
next figure. Even though the U.S. is the largest external debtor in
the world, it receives investment income from the rest of the world.
At the end of 2016, the U.S. net international investment position
stood at $-8.3 trillion, and its net investment income was $+0.2
trillion.
How can this paradoxical situation happen? Here are two suggested
explanations: Dark Matter and Return Differentials. After the
next figure, we will spell them out.
46
Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Positive Net Investment Income And Negative NIIP: A Paradox?
Figure 1.9: Net Investment Income and the Net International Investment Position,
United States 1976 to 2016
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020−500
−400
−300
−200
−100
0
100
200
300
US
Ne
t In
ve
stm
en
t In
co
me
, $
bn
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020−10000
−8000
−6000
−4000
−2000
0
2000
4000
6000
US
NII
P,
$b
n
NII (left)
NIIP (right)
Data Source: BEA, bea.gov, ITA, Table 1.1., (December 19, 2017 release).
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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
What is plotted?
Solid (blue) line: Net Investment Income (NII), which are income
receipts on U.S. owned assets abroad minus income payments on
foreign-owned assets in the United States. [left scale, $bn]
Broken (red) line: Net International Investment Position (NIIP ),
which represents net foreign wealth of the United States. [right
scale, $bn]
Sample: 1976 to 2016.
Data Source: Bureau of Economic Analysis. NIIP : Table 1. International In-vestment Position of the United States at the End of the Period. NII: U.S. Inter-national Transactions Accounts Data, Table 1. U.S. International Transactions,Lines 13 and 30.
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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
1.7.1 Explaining the NII-NIIP Paradox: (I) Dark Matter
The Dark Matter hypothesis maintains that in reality the U.S. net
international investment position is positive, but that the Bureau of
Economic Analysis fails to account for all of it.
Assuming this theory is valid, how much dark matter is there in the
NIIP? Let’s make a simple calculation. First some notation:
TNIIP = the ‘true’ net international investment position.
NIIP = the observed net international investment position (-9.6
trillion in 2018).
NII = net investment income (258.1 billion in 2018, see the table in
slide 16).
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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Net investment income is the return on the True Net International
Investment Position. So, letting r denote the interest rate, we have
NII = rTNIIP
Let’s take a value of r of 5% per year. Then solving for TNIIP we
have
TNIIP = NII/r =0.2581
0.05= 5.2 trillion dollars
Dark matter is simply the difference between the true and the recorded
NIIP s, or
Dark Matter = TNIIP - NIIP = 5.2−(−9.6) = 14.8 trillion dollars!in2018
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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
So, according to the dark-matter theory, the U.S. doesn’t owe $9.6
trillion to the rest of the world. On the contrary, the rest of the
world owes $15.2 trillion to the United States.
$14.8 trillion of dark matter seems like a big figure to go unnoticed
by the BEA (and the IRS!).
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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
1.7.2 Explaining the NII-NIIP Paradox (II): Return Differentials
This second explanation is motivated by the observation that the
gross international asset position of the U.S. is mostly composed
of risky but high-return assets, such as foreign stocks, whereas its
gross international liability position is composed of safer low-return
assets, such as U.S. government bonds (e.g., T-bills).
Let A continue to denote the U.S. international asset position and
L its international liability position. Then NIIP = A − L. Let rA be
the return on A, and rL the return on L.
The question is how large does the interest rate differential on assets
and liabilities, rA − rL, have to be to explain the paradox.
Start by noting that the NII must equal the difference between in-
vestment income and investment payments, that is,
NII = rAA − rLL.
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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Now let’s put some numbers. In 2018, the U.S. gross international
asset position was $25.3 trillion, and its gross international liability
position was $34.8 trillion. In addition, the average real rate of
return on U.S. T-bills, which we will use as a proxy for rL, was low,
2.25% per year. (Data from the FRB.) Finally, as we mentioned
earlier, NII was $258.1 billion. Thus, we set A = 25.3, L = 34.8,
NII = 0.2581, and rL = 0.0225.
We wish to find the value of rA that solves the paradox. To this
end, solve the above equation for rA
rA =NII + rLL
A=
0.2581 + 0.0225× 34.8
25.3= 0.0412
That is, rA = 4.12%, or an interest rate differential between the
U.S. foreign assets and liabilities of rA − rL = 1.9% per year. This
doesn’t look like an exorbitant premium.
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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Why is it that a relatively small interest rate differential suffices to
explain the NII-NIIP paradox?
Recall that gross asset and liability positions of the U.S. have become
very large relative to the net position (A = 25.3, L = 34.8). Hence
just a relatively small rate of return differentials can lead to a positive
NII even though the NIIP is negative.
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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
The Flip Side of the Paradox
If the return-differential hypothesis is correct, then some country or
group of countries in the rest of the world must experience a flip
version of the paradox, that is, negative net investment income and
a positive net international investment position.
A natural candidate is China. This country holds large amounts of
U.S. government bonds, which are safe, earn low return. At the
same time, the rest of the world invest in more risky but higher
assets in China, such as stocks (FDI).
The next figure shows that this is indeed the case. Since 2000,
with the exception of the Great Contraction years (2007 and 2008),
China has displayed a positive NIIP and a negative NII.
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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Figure 1.10: Net Investment Income and the Net International Investment
Position, China 1982 to 2015
1980 1985 1990 1995 2000 2005 2010 2015 2020−100
−50
0
50
100
150
200
250C
hin
a N
et In
vestm
ent In
com
e, $bn
1980 1985 1990 1995 2000 2005 2010 2015 2020−1000
−500
0
500
1000
1500
2000
2500
Chin
a N
IIP
, $bn
NII (left)
NIIP (right)
Data Source: NIIP is from Lane and Milesi-Ferretti (2017) and NII is from imf.data.org.
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Schmitt-Grohe, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 1: Global Imbalances
Summing Up• The current account (CA) keeps record of a country’s net exports
of goods and services and net international income receipts.
• The CA has three components, the trade balance (TB), the in-
come balance, and net unilateral transfers.
• For most countries, including the United States, the TB is the
largest component of the CA.
• In the United States, the TB and the CA move closely together
over time.
• The United States have been running large CA deficits since the
early 1980s.
• CA deficits deteriorate a country’s net international investment
position NIIP, which is the difference between a country’s interna-
tional asset position and its international liability position.
• Due to its large CA deficits, the United States turned from being
a net external creditor to being the world’s largest debtor.
• A second source of changes in a country’s NIIP position is val-
uation changes, originating from changes in exchange rates and in
57
the price of the financial instruments that compose a country’s as-
set and liability positions. In the United States, valuation changes
became large in the early 2000s, reaching values as high as plus or
minus 15 percent of GDP in a single year.
• Paradoxically, the United States has a negative NIIP and posi-
tive net investment income (NII). Two stories aim to explain the
NIIP − NII paradox: the dark matter hypothesis and the rate-
of-return-differential hypothesis. The NIIP − NII paradox in the
United States must have a flipped paradox in the rest of the world.
We documented that China has had a positive NIIP and negative
NII since the 2000.
• Global Imbalances: Worldwide, the distribution of external debts
and credits is not even. Some countries, like the United States, are
large debtors and some, like China, are large creditors.