Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

According To CEPR Study US External Adjustment Is Easier Than You Think

16.02.2005


Understanding the dynamic process of adjustment of a country’s external balance is one of the most important questions for international economists. The recent wave of financial globalization has led to a sharp increase in cross-holdings of foreign assets and liabilities. The upsurge in cross-border holdings has therefore opened the door to potentially large wealth transfers across countries. In CEPR Discussion Paper No. 4923, Pierre-Olivier Gourinchas and Hélène Rey argue that to fully explain the dynamics of the current account, economic analysis must incorporate capital gains and losses on the net foreign asset position.



While standard economic theory suggests that the US will need to run trade surpluses to reduce its current account deficits, the authors show that a substantial part of the adjustment can take place through a change in the returns on US assets held by foreigners relative to the return on foreign assets held by the US. Importantly, this previously unexplored ‘financial adjustment channel’ may transfer wealth via a depreciation of the dollar. At the moment, almost all US foreign liabilities are in dollars and approximately 70% of US foreign assets are in foreign currencies. This means that a 10% fall in the dollar would transfer 5% of US GDP from the rest of the world to the US. In comparison, the trade deficit on goods and services amounted to ‘only’ 4.4% of US GDP in 2003. The large transfers of wealth that may take place on external liabilities through the financial adjustment channel therefore significantly alter the need to run future trade surpluses or deficits.

Using a newly constructed dataset, the authors find that 30% of the adjustment towards long-run external debt sustainability of the United States is realized though financial valuation effects, on average. The effect of a fall in the dollar on the trade balance is a longer-run phenomenon and does about 70% of the work. They find that contrary to the conventional wisdom about the extent of the US external imbalance, the large revaluation of US assets that has taken place since early 2002 through the fall in the dollar has meant the imbalance is now less than in the 1980s. This is shown in the graph below, which takes into account valuation effects:


The authors caution, however, about any systematic policy seeking to depreciate the dollar to achieve valuation gains: it requires that foreign investors remain willing to accumulate further holdings of (depreciating) dollar denominated assets.

Gourinchas and Rey also use their framework to predict exchange rate depreciations. Their model consistently and decisively beats the ‘random walk’ model that is the generally accepted benchmark in economics. The random walk states that the best prediction of any future exchange rate is the current exchange rate. Therefore, the results of this paper show that another proposition of the conventional wisdom – that exchange rate modelling cannot do better than the random walk – is no longer true.

Robbie Lonie | alfa
Further information:
http://www.cepr.org

More articles from Business and Finance:

nachricht Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Unraveling the nature of 'whistlers' from space in the lab

A new study sheds light on how ultralow frequency radio waves and plasmas interact

Scientists at the University of California, Los Angeles present new research on a curious cosmic phenomenon known as "whistlers" -- very low frequency packets...

Im Focus: New interactive machine learning tool makes car designs more aerodynamic

Scientists develop first tool to use machine learning methods to compute flow around interactively designable 3D objects. Tool will be presented at this year’s prestigious SIGGRAPH conference.

When engineers or designers want to test the aerodynamic properties of the newly designed shape of a car, airplane, or other object, they would normally model...

Im Focus: Robots as 'pump attendants': TU Graz develops robot-controlled rapid charging system for e-vehicles

Researchers from TU Graz and their industry partners have unveiled a world first: the prototype of a robot-controlled, high-speed combined charging system (CCS) for electric vehicles that enables series charging of cars in various parking positions.

Global demand for electric vehicles is forecast to rise sharply: by 2025, the number of new vehicle registrations is expected to reach 25 million per year....

Im Focus: The “TRiC” to folding actin

Proteins must be folded correctly to fulfill their molecular functions in cells. Molecular assistants called chaperones help proteins exploit their inbuilt folding potential and reach the correct three-dimensional structure. Researchers at the Max Planck Institute of Biochemistry (MPIB) have demonstrated that actin, the most abundant protein in higher developed cells, does not have the inbuilt potential to fold and instead requires special assistance to fold into its active state. The chaperone TRiC uses a previously undescribed mechanism to perform actin folding. The study was recently published in the journal Cell.

Actin is the most abundant protein in highly developed cells and has diverse functions in processes like cell stabilization, cell division and muscle...

Im Focus: Lining up surprising behaviors of superconductor with one of the world's strongest magnets

Scientists have discovered that the electrical resistance of a copper-oxide compound depends on the magnetic field in a very unusual way -- a finding that could help direct the search for materials that can perfectly conduct electricity at room temperatur

What happens when really powerful magnets--capable of producing magnetic fields nearly two million times stronger than Earth's--are applied to materials that...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Within reach of the Universe

08.08.2018 | Event News

A journey through the history of microscopy – new exhibition opens at the MDC

27.07.2018 | Event News

2018 Work Research Conference

25.07.2018 | Event News

 
Latest News

Staying in Shape

16.08.2018 | Life Sciences

Diving robots find Antarctic seas exhale surprising amounts of carbon dioxide in winter

16.08.2018 | Earth Sciences

Protein droplets keep neurons at the ready and immune system in balance

16.08.2018 | Life Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>