Transcript Diapositive 1 - University of British Columbia

International Finance
Econ 356
Karine Gente
[email protected]
• Web page:
http://www.econ.ubc.ca/directory/sess/sfac
kg.htm
Office room: Buch tower 1099 D
• Teaching Assistant: Kang Shi
Email: [email protected]
Office room: Buch tower 1099C
Office hrs: Friday 2:00-3:00
Introduction
Macroeconomic Equilibrium and
Open Economy
Open economies
• The development of international trade
(volume)
• Trade barriers and restrictions on capital
flows tend to disappear (GATT + WTO
rounds)
• A disequilibrium between imports and
exports
Exports and Imports as a % of GDP
(1960-2000)
Japan
France
30
25
20
15
10
1960
1965
1970
1975
1980
1985
1990
1995
2000
Canada
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
15
13
11
9
7
5
United States
45
35
30
25
20
15
1965
1970
1975
1980
1985
1990
1995
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
14
12
10
8
6
4
40
International trade
Table 1.5 Top 15 international trade ($bn.), 1999
country
exports % of world
country
USA
imports
% of world
1,116
15.9
1
USA
956
13.7
2
Germany
626
8.9
Germany
593
8.5
3
Japan
465
6.6
UK
396
5.7
4
France
382
5.5
Japan
380
5.4
5
UK
374
5.3
France
338
4.8
6
Italy
292
4.2
Italy
275
3.9
7
Canada
278
4.0
Canada
259
3.7
8
Netherlands
249
3.6
Netherlands
220
3.1
9
China
219
3.1
Hong Kong
203
2.9
10 Hong Kong
212
3.0
China
190
2.7
Imports and Exports
as a percentage of output: 2000
Percentage40
of GDP
35
30
25
20
15
10
5
0
Canada France Germany
Imports
Exports
Italy
Japan
U.K.
U.S.
International trade (1999)
Exports
1200
USA
relative
to
1000
imports
import value
800
600
Germany
400
Japan
200
Netherlands
0
0
200
400
600
export value
800
1000
1200
• International trade becomes more
intensive.
• The openess degree measured by
(EX+IM)/GDP is about 73% for Canada
against 23% for Japan.
• Exports need not be equal to imports
-> Capital flows
-> The higher IM-EX, the more the country
dependent on the rest of the world.
Money (I)
Domestic
Country
Rest of
the World
Imports
Exports
Domestic
Country
Rest of the World
Money (II)
• Imports>Exports I>II
Domestic
Country goes into debt vis-à-vis the Rest
of the World
• Imports<Exports I<II
Domestic
Country goes into excedent vis-à-vis the
Rest of the World
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
Canada
Current account balance (% of GDP)
3
2
1
0
-1
-2
-3
-4
-5
-6
Measures of Financial Integration
Industrial Countries
1.0
Restriction Measure (left scale)
1.5
Openness Measure (right scale)
0.8
1.2
0.6
0.9
0.4
0.6
0.2
0.3
0.0
0.0
1970
1974
Source: WEO, Lane and Milesi-Ferreti (2003)
1978
1982
1986
1990
1994
1998
Measures of Financial Integration
Developing Countries
1.0
0.50
Openness Measure (right scale)
Restriction Measure (left scale)
0.8
0.40
0.6
0.30
0.4
0.20
0.2
0.10
0.0
0.00
1970
1974
Source: WEO, Lane and Milesi-Ferreti (2003)
1978
1982
1986
1990
1994
1998
• We can distinct capital flows as
– Bank lending (Indirect Finance)
– Portfolio flows (Direct Finance)
– Foreign Direct Investment: Investment of a foreign
firm in a country. FDI is driven by the desire of
entreprises to exploit their intangible property in
markets outside their home country.
• Portfolio flows vary sharply instead of FDI are
quite insensitive to short-run swings in
macroeconomic conditions
Direct vs. Indirect Finance
Net Private Capital Flows
(Billions of USD)
All Developing Economies
180
Bank Lending
160
Portfolio Flows
FDI
140
120
100
80
60
40
20
0
1970
1975
1980
1985
-20
Year
Source: WEO
1990
1995
Net Private Capital Flows
(Billions of USD)
More Financially Integrated Economies
Less Financially Integrated Economies
180
9
8
Bank Lending
160
Portfolio Flows
Portfolio Flows
7
FDI
140
Bank Lending
FDI
6
120
5
100
4
80
3
60
2
40
1
20
0
1970
0
1970
1975
1980
1985
-20
1980
1985
1990
1995
-2
Year
Source: WEO
1975
-1
Year
1990
1995
• All this evidence suggests that
international economic integration has
hugely increased.
• What are the consequences?
– Growth and development
– Efficiency of government policies
– Contagion and crisis
International Economic
Integration (IEI)
IEI refers to the extent and strength of realsector and financial-sector linkages
among national economies. Real-sector
linkages occur through the international
transactions in goods and services while
the financial-sector linkages occur
through international transactions in
financial assets.
Channels Through Which IEI Can Raise
Economic Growth
International Economic Integration
Direct Channels
 Augmentation of available savings
 Transfer of technology (FDI)
 Development of financial sector
Indirect Channels
 Promotion of specialization
 Inducement for better policies
 Enhancement of capital inflows by
signaling better policies
Higher Economic Growth
International economic integration
could help growth and development
International Economic Integration
and Contagion
International economic integration
Real sector linkages
through exchange of goods
Financial-sector linkages
through international
transactions in financial
assets.
Contagion (crisis, fiscal policy…)
Example
• Imagine two countries: A and B
Expansionary Fiscal
Policy in Country A
Country B’s Income ↑
↑ Demand (country A)
- Domestic goods
- Imports
Country B’s Exports ↑
Example
• Imagine A and B are developing countries with
common features (GDP per capita, inflation, …).
• You have in your bonds portfolio some bonds of
Country A government’s debt and some of
Country B government’s debt.
• Country A’s government says that the
government debt cannot be reimbursed, what do
you do?
Questions of International Finance
• Why international trade and international capital
flows?
• What are the consequences of international
economic integration on production (flows of
inputs)? Consumption (flows of goods)?
• How international economic integration changes
the way monetary and fiscal policies affect
economies?
• How do crisis appear and spread?
Reminder about Macroeconomic
Equilibrium in an Open Economy
Readings:
Macroeconomics, N. Gregory
Mankiw (Harvard U.), chapter 5.
In an open economy,
• Spending need not equal output:
Y≠C+I+G
• Saving need not equal investment
S≠I
• The financial sector
channels funds from net
lender-savers to net
borrower-investors
• Because financial sector
can redirect surplus
funds, leakages and
injections of each sector
need not balance
– I ≠S
– G ≠T
– Im ≠ Ex
Preliminaries
C C d C f
I Id If
G G d G f
superscripts:
d = spending on
domestic goods
f = spending on
foreign goods
EX = exports =
foreign spending on domestic
goods
IM = imports = C f + I f + G f
= spending on foreign goods
Preliminaries, cont.
NX = net exports ( the “trade balance”)
= EX – IM
• If NX > 0,
country has a trade surplus
equal to NX
• If NX < 0,
country has a trade deficit
equal to – NX
GDP = expenditure on
domestically produced g & s
Y  C d  I d  G d  EX
 (C  C f )  (I  I f )  (G  G f )  EX
 C  I  G  EX  (C f  I f  G f )
 C  I  G  EX  IM
 C  I  G  NX
The national income identity
in an open economy
Y = C + I + G + NX
or,
NX = Y – (C + I + G )
domestic
spending
net exports
output
International capital flows
• Net capital outflows
= S –I
= net outflow of “loanable funds”
= net purchases of foreign assets
the country’s purchases of foreign assets
minus foreign purchases of domestic
assets
• When S > I, country is a net lender
• When S < I, country is a net borrower
Another important identity
NX = Y – (C + I + G )
implies
NX = (Y – C – G ) – I
=
S
– I
trade balance = net capital
outflows
Long-run Equilibrium
• An open economy
model :
– Two countries
Country A
SA,IA
Country B
SB,IB
IA+IB=SA+SB
– Small open economy
Domestic Country
Rest of the World
r*
Saving and Investment
in a Small Open Economy
production function:
consumption function:
investment function:
Y Y  F (K , L)
C  C (Y T )
I  I (r )
exogenous policy variables: G  G , T  T
National Saving:
The Supply of Loanable Funds
r
S Y  C (Y T )  G
To simplify,
national saving does
not depend on the
interest rate
S
S, I
Assumptions re: capital flows
a. domestic & foreign bonds are perfect
substitutes (same risk, maturity, etc.)
b. perfect capital mobility:
no restrictions on international trade in
assets
c. economy is small:
cannot affect the world interest rate,
denoted r*
a & b imply r = r*
c implies r* is exogenous
Investment:
The Demand for Loanable Funds
r
Investment is still a
downward-sloping function
of the interest rate,
but the exogenous
world interest rate…
r*
…determines the
country’s level of
investment.
I (r )
I (r* )
S, I
If the economy were closed…
r
…the interest
rate would
adjust to
equate
investment
and saving:
S
rc
I (r )
I (rc )
S
S, I
But in a small open economy…
the exogenous
world interest
rate determines
investment…
r
r*
…and the
difference
between saving rc
and investment
determines net
capital outflows
and net exports
S
NX
I (r )
I1
S, I
Three experiments
1. Fiscal policy at home
2. Fiscal policy abroad
3. An increase in investment
demand
1. Fiscal policy at home
r
An increase in G
or decrease in T
reduces saving.
r
*
1
S 2 S1
NX2
NX1
Results:
I  0
I (r )
NX  S  0
I1
S, I
2. Fiscal policy abroad
Expansionary
fiscal policy
abroad raises
the world
interest rate.
r
NX2
r2*
S1
NX1
r
*
1
Results:
I  0
I (r )
NX  I  0
I (r )
*
2
I (r1* )
S, I
3. An increase in investment
demand
r
S
r*
EXERCISE:
Use the model to
determine the impact
of an increase in
investment demand
on NX, S, I, and net
capital outflow.
NX1
I (r )1
I1
S, I
3. An increase in investment
demand
r
ANSWERS:
I > 0,
S = 0,
S
NX2
r*
net capital
outflows and
net exports
fall by the
amount I
NX1
I (r )2
I (r )1
I1
I2
S, I
References
• The Economics of Money, Banking and
Financial Markets, 6th edition, Mishkin.
• International Economics: Theory and
Policy, Paul Krugman and Maurice
Obstfeld .
Course Overview
I. International capital mobility
a. Why international capital flows?
b. The reasons of exchange: some
aspects of international trade and
intertemporal choice
c. Recent evolutions of financial
integration
d. The Balance of Payments
Course Overview
II.
The Exchange rate: a key variable
a. Some definitions of exchange rate
b. Exchange rates in the long-run: The
Purchasing Power Parity (PPP) theory
c. Different exchange rate regimes
Course Overview
III.
Consequences of financial
integration on short-run macroeconomic
equilibrium: the Mundell-Fleming approach
a. The short-run equilibrium
b. Monetary and Fiscal Policies in case of
flexible exchange rate
c. Monetary and Fiscal Policies in case of
fixed exchange rate
IV. Currency crises