Ppt on current account deficit and exchange

1 Chapter 3 Fiscal Deficits, Public Debt, and The Current Account © Pierre-Richard Agénor The World Bank.

bears interest at i*); E: nominal exchange rate; L g : nominal stock/current account deficits. l Figure 3.8: correlation between budget deficits and current account deficits not suggest any clear pattern. l Correlation between fiscal and external deficits depends on the effect of fiscal policy on the private sectors investment and saving decisions. l Fiscal deficits may respond to, rather than cause, changes in the current account. 54 55 Consistency and Sustainability l The Consistency Framework l Fiscal and/


Exchange Rate Regimes and Global Imbalances Kuala Lumpur, 28 March 2006 An Overview Andrew Sheng Tun Ismail Ali Chair in Monetary and Financial Economics,

producers and low-income countries –Demand from deficit countries need to move to surplus countries Two greatest worries - –US will slow abruptly –Financing of US deficit will change. US current account deficit is financed by foreign private investors, while US private investments abroad are financed by foreign central banks. Global Imbalances - Five Views Deutsche Banks "Bretton Woods Two": No need to change fiscal balances, current account balances or exchange/


1 The US-China Marriage of Convenience: Prospects for Global Imbalances and Economic Recovery The US-China Marriage of Convenience: Prospects for Global.

prime lender that can continue financing its massive current-account deficits Is China equally to blame for global imbalances and the failure to reduce them? Will the US continue to run huge current-account deficits and undermine the basis for global recovery? 3 Pinning the Blame on China for Global Imbalances China is often blamed for causing global imbalances, mainly through ‘exchange-rate manipulation’ (US Treasury Secretary Geithner’s/


The Foreign Exchange Market. Currency variability  Currencies vary widely in value over time.  The US dollar has shown weakness from time to time, but.

& services (current account) –financial transactions These sum to total demand and supply  The equilibrium exchange rate is determined by the total demand and supply Demand and supply and the current account  In the following slide, the equilibrium exchange rate is lower than the rate needed for a current account balance (our exchange rate would be more valuable than would be the case if there were only current account transactions)  Therefore, there is a current account deficit (shown as/


38 - 1 Copyright McGraw-Hill/Irwin, 2002 U.S. Export Transaction U.S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency.

must balance. In our country our large current account deficits tend to be balanced with large capital account surpluses. 38 - 21 Copyright McGraw-Hill/Irwin, 2002 U.S. Export Transaction U.S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency Determinants of Exchange Rates Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms Previous Slide Next Slide End/


Exchange rates and the Mundell-Fleming model Imports, exports, exchange rates From IS-LM to Mundell-Fleming Policy in an open economy.

the 1990’s Current account and capital account The amount of savings required to finance the current account deficit of the USA has tripled since 1997. On the other had, the emerging economies have become net providers of savings flows. Europe and Asia (including Japan) has covered 2/3 of the funding needs of the USA in 2002. Exchange rates and Mundell-Fleming Imports, exports and exchange rates Current account, capital account and balance of payments/


International Payment Flows and Economic Policy in a Global World Prof. Catherine Bonser-Neal Kelley School of Business Indiana University International.

Rates Expansionary Policy ?? Contractionary Policy Unemployment inflation Current Account Surplus Current Account Deficit The Problem Areas: If have high inflation but a surplus, then contractionary monetary policy to address high inflation could lead to higher current account surplus If have unemployment and a deficit, expansionary policy could worsen the deficit Fixed vs. Flexible Exchange Rates? Advantages of Floating: independent monetary policy exchange rate movements can help achieve external balance/


International Finance and the Foreign Exchange Market.

are known as official reserve transactions. A current account deficit must be exactly offset by a financial account surplus, leaving the balance of payments equal to zero. Why Is the Balance of Payments Always Zero? Balance of Payments Under a pure flexible rate system, the foreign exchange market will bring the quantity demanded and the quantity supplied into balance, and as a result, it will also bring/


What’s Up with the Exchange Rate? What’s Up with the Exchange Rate? Andrew K. Rose UC Berkeley, NBER and CEPR December, 2009.

% of American GDP –Around $11,400 per American –Up from $2,139.9 billion in 2007 –Continuing flows of deficits add to stock of debt –America: persistent current account deficits since 1991 Exchange Rates3 4 Causes  Some Dispute among Economists  Current Account is difference between (low) Domestic Savings and (higher) Investment  Low American Savings chief reason –Personal Savings very low lately  Sometimes negative, though recent increase –Public Sector/


The Balance of Payments, Exchange Rates, and Trade Deficits Chapter 38 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.

stock –Sell your house to a foreigner Requires currency exchange 38-3 Balance of Payments Sum of international financial transactions Current account –Balance on goods and services –Net investment income - interest –Net transfers –Balance on current account 38-4 Balance of Payments Capital and financial account –Capital account – Debt forgiveness –Financial account - Assets Balance of payments accounts sum to zero Current account deficits generate asset transfers to foreigners Official reserves 38-6 1945/


Balance of Payments: Accounts and Analysis Thorvaldur Gylfason Course on External Vulnerabilities and Policies Tunis, March 2–13, 2009.

 Other factors  Capacity to meet financial obligations  Availability of external financing  When does a current account deficit become a source of concern?  When continued current account deficits, reflecting the behavior of the government and the private sector, require drastic adjustment of economic policies in order to avoid a crisis, e.g., Collapse of exchange rate Default on external debt payments solvent  A country is solvent if the present/


Asymmetric Financial Developments and Global Economic Imbalances: A Lucus’ Paradox between the U.S. and China by Peter C.Y. Chow The City College and Graduate.

(2008) noted that, prior to 2000, most the current account deficits in the U.S. were financed by private foreign direct investment attracted by the productivity and profitability of the U.S. economy. But, after 2000, the U.S. trade deficits were financed through the issuance of Treasury Bonds, which mainly were purchased and being held as foreign exchange reserves by the central banks in many of/


US, China and Europes imbalances : Problems and scenarios for the Eurozone Marc Lavoie.

exchange rates still bring the eurozone current account towards equilibrium (zero), but there is no tendency for each country of the eurozone to have a balanced current account (and hence a balanced budget position). Interest rates can remain constant, but the ECB must accept a transformation of the composition of its assets (it must hold more assets issued by the deficit/, driving the US economy into a current account deficit and a government budget deficit. Some qualitative simulations (not calibrated) /


Fundamental Analysis Classical vs. Keynesian. Similarities Both the classical approach and the Keynesian approach are macro models and, hence, examine.

interest rate unchanged. Summary The current account is unaffected as are domestic interest rates The current account is unaffected as are domestic interest rates Assuming that the deficit has no effect on GDP, money markets are unaffected leaving prices and exchange rates (real and nominal) unchanged. Assuming that the deficit has no effect on GDP, money markets are unaffected leaving prices and exchange rates (real and nominal) unchanged. Keynesian Analysis Suppose that/


Estimating equilibrium exchange rate - FEER vs BEER - MCs student: Ana Simona Manu Supervisor Professor: Moisă Altăr July, 2010 Academy of Economics Studies.

, which is based on a direct estimation of the sustainable level of the current account deficit considering the investment – savings relation  BEER: first introduced by Clark and MacDonald (1998), aims to asses the equilibrium exchange rate by using a more empirical approach based on fundamental variables affecting the evolution of the exchange rate on short and medium term.  for CEEC countries the most employed models are FEER/


Copyright McGraw-Hill/Irwin, 2002 U.S. Export Transaction U.S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency.

Rates The Market for Currency Determinants of Exchange Rates Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms Previous Slide Next Slide End Show BALANCE OF PAYMENTS Current Account Trade Deficits & Surpluses Balance on Goods & Services Balance on Current Account Capital Account Balance on Capital Account Official Reserves Balance of Payment Deficits & Surpluses Copyright McGraw-Hill/Irwin, 2002 U.S. Export Transaction U.S. Import/


Thorvaldur Gylfason Course on External Vulnerabilities and Policies Tunis, February 15-26, 2010.

 Overheating of the economy  Excessive expansion of aggregate demand with inflation, real currency appreciation, widening current account deficit  Increase in consumption and investment relative to GDP  Quality of investment suffers  Construction booms – count the cranes!  Monetary consequences of capital inflows and accumulation of foreign exchange reserves depend on exchange regime  Fixed exchange rate: Inflation takes off  Flexible rate: Appreciation fuels spending boom Source: IMF WEO, Oct. 2007/


HL Balance of Payments IB Economics The consequences of a current account deficit  If the current account is in deficit then the capital account will.

PEDexports + PEDimports > 1 The J-Curve effect  In the short term a depreciation of the exchange rate may not improve the current account deficit of the balance of payments  This is due to the low price elasticity of demand for imports and exports in the immediate aftermath of an exchange rate change  Initially the volume of imports will remain steady partly because contracts for imported goods/


The Balance of Payments, Exchange Rates, and Trade Deficits Chapter 38 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.

financial assets –Buy stock –Sell your house to a foreigner Requires currency exchange 38-3 Balance of Payments Sum of international financial transactions Current account –Balance on goods and services –Net investment income –Net transfers –Balance on current account 38-4 Balance of Payments Capital and financial account –Capital account –Financial account Balance of payments accounts sum to zero Current account deficits generate asset transfers to foreigners Official reserves 38-5 U.S. Trade/


COMESA Experiences in Macroeconomic Convergencw IBRAHIM A. ZEIDY COMESA MONETARY INSTITUTE Presented at the Regional Workshop on Exchange of Experiences.

prices. Late disbursement of external aid flows has also contributed to the deterioration in the current account balances and the depreciation of the exchange rates in a number of countries. It is worthwhile to note that current account deficit that results from high level of productive investment is desirab le. Current account position improved slightly in most countries in the region in 2011 as compared to 2010. the deterioration/


Macroeconomics In The Global Economy Wei wei Shool of Economics and Finance Jiaotong University.

i = i* We now put together all these pieces to find a simple relationship between the money supply and exchange rate. M V(i*) = EP*Q If the exchange rate is fixed by the central bank, we can describe M as a function of the level of E /can be achieved, and various trade-offs must be made. A government with two policy instruments and two targets Suppose that a government wants to keep output unchanged while at the same time reducing the current account deficit and that it has monetary and fiscal policy at its/


Economic Vocabulary All the terms you need to know and are afraid to hear.

Demand Aggregate Demand  Aggregate demand and Aggregate supply Model Aggregate demand and Aggregate supply Model  Aggregate Supply /-out effect Three  Current account Current accountCurrent account deficit Current account deficitCurrent account surplus Current account surplus  Customs union / Eight  Macroeconomic equilibrium Macroeconomic equilibrium  Macroeconomics Macroeconomics  Managed exchange rate Managed exchange rate  Marginal Marginal  Marginal analysis Marginal analysis  Marginal/


Macro Unit VII: International Economics Chapters 35 and 36.

to encourage exports 0 The US has persistently large current account deficits that must be offset by capital and financial account surpluses, which of growing concern… Payments Deficits and Surpluses Foreign Exchange Markets Financing International Trade 0 Foreign exchange markets (also known as currency markets) enable international transactions to take place by providing markets for the exchange of national currencies 0 Exchange rate – the price of the domestic currency in terms/


Copyright 2008 The McGraw-Hill Companies 36-1 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates.

-Hill Companies 36-4 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Balance of Payments- sum of all transactions that take place between it’s residents and residents of foreign nations. The Current Account –Record of nations exports and imports of: goods and services (Product, travel, insurance) Net investment income(US/


© OnlineTexts.com p. 1 Chapter 7 Foreign Exchange and the Balance of Payments Foreign Exchange and the Balance of Payments.

the world. Debits are items that represent demand for foreign exchange. Credits are items that represent supply of foreign exchange. © OnlineTexts.com p. 21 The Balance of Payments The Balance of Payments is composed of two major accounts: –The current account primarily tracks the international flow of goods and services. Exports and imports dominate the current account. – The capital account primarily tracks the international flow of financial assets. Capital inflows/


Introduction to the Course and Main Issues in the Global Economy by Nouriel Roubini Stern School of Business New York University September 2016.

demand Impact of low oil on growth and inflation Exchange rates and External imbalances The strength of the U.S. in the 1990s relative to Euro, Yen and other currencies led to a large a growing current account deficit in the US as the US lost competitiveness After 2000, the US current account deficit worsened further as the fiscal deficits mushroomed (“twin deficits”) and as the private savings rate sank close to zero/


Senior Scholar, Levy Economics Institute of Bard College

investment projects. Keynes’s advocated a current account budget balance. This would ensure that citizens knew the real cost of government services, and would avoid moral hazard. The capital account, including ELR expenditure, would be used for countercyclical demand policy. An ELR programme would provide an implicit counter-cyclical aspect, but it would have to be in constant deficit as determine by the demand for/


Lectures 33-39: BOP & Exchange Rate Systems

Exchange Rate Systems Components of BOP Exchange rate and its determination Fall 2007 NU-FAST Zahid Siddique BOP Accounts Balance of Payment is record of a country’s international transactions—sum of current and capital accounts BOP = CA + KA Current Account is record of a country’s international trade in currently produced goods and/have LHS so we have means trade surplus if (S – I) > 0, and deficit if (S – I) < 0 Deficit now reflects low level of national savings relative to investment or a high rate of /


Currencies and Exchange Rates To buy goods and services produced in another country we need money of that country. Foreign bank notes, coins, and.

more costly and our exports more competitive. So in the short run, fall in the nominal exchange rate decreases the current account deficit. But in the long run, a change in the nominal exchange rate leaves the real exchange rate unchanged. So in the long run, the nominal exchange rate plays no role in influencing the current account balance. Exchange Rate Policy Three possible exchange rate policies are Flexible exchange rate Fixed exchange rate/


Systemic issues of the international monetary and financial system Contribution to the informal review session on Chapter VI of the Monterrey Consensus.

real pressure on CA surplus countries to adjust (they simply pile foreign exchange reserves); there is also no pressure on the US as the country with the largest BOP deficit and debt On the other side, strong pressure on CA deficit countries On the other side, strong pressure on CA deficit countries B/2. Current account imbalances (II) What may be done to address this issue What/


1 The Prospects for Export-Led Growth: Global Imbalances and International Reforms The Prospects for Export-Led Growth: Global Imbalances and International.

costs, current-account deficits (especially if deficits are financed by short-term external loans) They were subjected to speculative attacks on their currencies and recessions, and were forced to endure a heavy and humiliating burden of IMF conditionalities 7 What are the Prerequisites for Such Export-Led Growth? Afterwards, East and Southeast Asian countries began to run sizeable yearly current-account surpluses And they amassed large stocks of foreign-exchange reserves Note/


1. The macro-economy: a theoretical model 2. Controlling the economy: fiscal policy 3. Money and the macro-economy 4. Inflation and unemployment 5. An.

, deposits (portfolio investment) Current account Exports+165 Imports -192 Services +11 Net income +7 Net govt transfers -4 Balance -13 Capital account FDI (net)+173 Portfolio (net)-143 Short-term flows (net) -23 Balance+10 Reserves +1 Error -2 Balance of payments 0 Surpluses and deficits in the BP Surplus: BP > 0 - foreign exchange reserves increase - accumulation of foreign assets - exchange rate too high Deficit: BP < 0 - foreign/


THE OPEN ECONOMY: INTERNATIONAL ASPECTS

) UK Current account Exports +165 Imports -192 Services +11 Net income +7 Net govt transfers -4 Balance -13 UK Capital account FDI (net) +173 Portfolio (net) -143 Short-term flows (net) -23 Balance +10 Reserves +1 Error -2 Balance of payments 0 Surpluses and deficits in the BP Surplus: BP > 0 - foreign exchange reserves increase - accumulation of foreign assets - exchange rate ‘too high’ Deficit: BP < 0 - foreign exchange reserves/


The Global Financial Crisis and the Slow Recovery

small fraction of the problem. Ben Barnanke (2005), “The Global Saving Glut and the U.S. Current Account Deficit,” offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Bernanke, lay not in /. But, they add, the American banking system is so much larger and diverse than Sweden’s that the parallels are limited. Capital injection and tax payers In exchange for the capital injection by the government, taxpayers might be protected through preferred/


Exchange Rates, Balance of Payments, and International Debt

that the dollar has _____ in value. Gottheil — Principles of Economics, 7e © 2013 Cengage Learning Floating Exchange Rates 1. Complete the sentence: When journalists say that the dollar has “weakened,” they mean that the/7e © 2013 Cengage Learning How Deficits on Current Account Develop If foreigners make huge investments in U.S. stocks and bonds, how might this affect the current account? Consequently imports increase and exports decline, causing a current account deficit. Gottheil — Principles of Economics/


Balance-of-Payments and Exchange-Rate Determination

a current account surplus. The current account is in balance when the quantity of the domestic currency supplied and the quantity demanded are equal. The Current Account The current account deficit is equivalent to the difference between the quantity of foreign exchange demanded and the quantity of foreign exchange supplied. At the spot exchange rate of 1.00, U.S. residents demand €220 million in foreign exchange and European residents supply €180 million. Hence, the current account deficit is/


Balance of Trade The balance of trade is the difference between the monetary value of exports and imports in an economy over a certain period of time.

purchasing assets abroad. A surplus will also usually lead to an appreciation of the currency on the foreign exchange markets there is a demand for the currency. How to correct a current account deficit. Depreciate the value of their currency to enable exports to be cheaper and imports to be more expensive. Protectionism – restriction of imports, (embargo, tariffs, quotas etc) – WTO may step in. Expenditure/


Highers Economics The sterling exchange rate Does a fall in the pound matter? The sterling exchange rate Does a fall in the pound matter?

borrowing money in a currency of a country where interest rates are low and exchanging it for another currency where the country pays higher interest rates. Causes of the falling pound The carry trade –UK has had long-term current account deficits Thus relatively high interest rates –Other countries, e.g. Japan and Switzerland, have had current account surpluses Thus relatively low interest rates –People borrowed from Japan/


Balance of Payments Accounting. The Balance of Payments Recall the open economy accounting identity: Income = ExpendituresRecall the open economy accounting.

pay by check) Balance of Payments Accounts Current Account ExportsGoods:Services:ImportsGoods:Services: Net Factor Income: Net Unilateral Transfers: -$350M CA Balance: -$350M Capital & Financial Account Foreign acquisition of US assets: US Treasuries/ Payments US Trade Weighted Exchange Rate Index Balance of Payments and Exchange Rates Should the Balance of Payments Accounts influence exchange rates? Should the Balance of Payments Accounts influence exchange rates? A BOP deficit (surplus) indicates that/


Balance of Payments Phil Bryson Global Trade and Finance.

its official reserve assets decline. What Drives Large U.S. Current Account Deficits ? What Drives Large U.S. Current Account Deficits ? See Coughlin & Pollard and the readings suggested in King, if interested. They are very short and reassuring. See Coughlin & Pollard and the readings suggested in King, if interested. They are very short and reassuring. The U.S. currently has a huge current account deficit. Why do we have it? Is it sustainable? The/


Chapter Objective: This chapter serves to introduce the student to the balance of payments. How it is constructed and how balance of payments data may.

BCA = balance on current account BKA = balance on capital account BRA = balance on the reserves account Under a pure flexible exchange rate regime, BCA + BKA = 0 3-9 U.S. Balance of Payments Data 2006 CreditsDebits Current Account 1Exports$2,096.3/ 3-24 Balance of Payments Trends Germany traditionally had current account surpluses. From 1991 to 2001Germany experienced current account deficits. This was largely due to German reunification and the resultant need to absorb more output domestically to rebuild/


The Balance of Payments

in real interest rates. BOP effect:Increase demand will encourage imports & discourage exports, which moves the current account towards deficit. Meanwhile, the higher interest rates attract foreign investment and discourage domestic investment from leaving the country, moving the financial account surplus. Exchange rate effects: The adverse impact of the current account will increase the SUPPLY of the country’s currency, causing the currency to depreciate. The positive impact/


C H A P T E R Prepared by: Fernando Quijano and Yvonn Quijano And Modified by Gabriel Martinez The Open Economy 18.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Openness in Goods Markets U.S. Current Account Deficit as a ratio of GDP, 1960-2006 Exports and imports, which were equal to 5% of GDP as recently as the 1960s, now stand / of the equation above is given by: © 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Interest Rates and Exchange Rates  This is the relation you must remember: Arbitrage implies that the domestic interest rate must be (approximately /


1 Jong-Wha Lee Korea University and ANU Warwick J McKibbin ANU and Lowy Institute Yung Chul Park Korea University The Transpacific Imbalance: An East Asian.

imbalances. –Many East Asian countries ran large current account deficits before the crisis. –much of the increase in current account surpluses is explained by low investment demand since the crisis. Figure 7. Real Effective Exchange Rate (China, Japan, and Korea) (Avg of 2000 = 100) Figure 8. Real Effective Exchange Rate (Indonesia, Malaysia, Philippines, Singapore, and Thailand) Figure 9. Real Effective Exchange Rate (Hong Kong and Taiwan) Table 4. International Reserves of/


1 Chapter 15 Capital Inflows: Macroeconomic Effects and Policy Responses © Pierre-Richard Agénor and Peter J. Montiel.

, the loss of competitiveness does not have to be absorbed immediately. l Link between real appreciation and emergence of current account deficits is not airtight: è Avoiding real appreciation has not necessarily implied avoiding current account deficits. è Both countries that experienced very substantial real exchange rate appreciation (Argentina and Mexico) exhibited large current account deficits. Lessons concerning sterilized intervention: l Important lesson: sterilization has been possible in spite of/


CHAPTER 18 Openness in Goods and Financial Markets Openness in Goods and Financial Markets CHAPTER 18 Prepared by: Fernando Quijano and Yvonn Quijano Copyright.

 bilateral exchange rate  multilateral exchange rate  multilateral real U.S. exchange rate  trade-weighted real exchange rate  effective real exchange rate  foreign exchange  balance of payments  above the line, below the line  current account  investment income  net transfers received  current account balance  current account surplus, current account deficit  capital account  net capital flows  capital account balance  capital account surplus, capital account deficit  statistical/


The balance of payments and the exchange rate

on the efficient market clearing mechanism implying that if the US was running a current account deficit, this would imply an excess demand for foreign exchange rate and lead to a depreciation of the dollar. This will make imports more expensive ans exports cheaper and providing the relevant elasticities were high enough, the current account would be brought back into balance. The advantage of floating is that, in/


1 International Issues in Economics. 2 Intro Individuals, businesses and governments in a country may interact with individuals, businesses and governments.

the government or the Federal Reserve does. Scenario 1 Say on the current account we have a deficit – this means less foreign exchange is coming to the table than going out. Also say privately on the capital and financial account we also have a deficit (or a surplus smaller in absolute size than the current account deficit). 17 The rest of the story Scenario 1 so far would be called/


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