Transcript Discussion of “Could capital gains smooth a current account

Discussion of “Could capital gains smooth
a current account rebalancing?”
by Cavallo and Tille
Akito Matsumoto (IMF)
This is my own view.
What They Did?
•
•
scenario analysis of current account
adjustment
real side of the model – OR (2005)
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–
–
–
–
–
•
3-region model
Traded Goods – Non-Traded Goods
LOOP holds
GDP deflator targeting
endowment economy
no shocks
more “realistic” adjustment scenario
–
dynamic adjustment
Dynamic Adjustment
•
heroic assumption
– constant net asset position
•
•
this pins down the adjustment length
constant new portfolio allocation - p
– simple and easy to understand
– requires CA=V -> constant net asset position
– gross position increases /not
– “exorbitant privilege” /not
•
the US pays lower interest rate on its liability
What Is Good About It?
• using the current portfolio for initial
condition
– more realistic than mirror image model
• focusing on valuation effect from the (real)
exchange rate movement
• simple model for policy circle
Result
1. slow adjustment: half life of CA, RER 3
years. 10yrs for near “SS”.
2. almost same degree of adjustment as OR
3. with “exorbitant privilege”
•
•
in the LR, 30% real depreciations
in the LR, net interest income >0 as gross
position grows. TB<0
4. w/o “exorbitant privilege”
•
•
in the LR, 40% real depreciations
standard result TB>0, NI<0
Is Slow Adjustment of RER
Realistic?
US Real Effective Exchange Rate
135
131.24
130
2 years
Feb 02-Jan 04
125
120
5 years
Jan 73-Oct 78
115
110
116.75
3 years
Mar 85-Jan 88
108.21
105
100
95
90
88.78
85
82.58
82.63
80
75
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
Is Depreciation Enough?
US Real Effective Exchange Rate and Current Account
135
-9.0
130
-8.0
125
-7.0
120
-6.0
115
-5.0
110
-4.0
105
-3.0
100
-2.0
95
-1.0
90
0.0
85
1.0
80
2.0
75
3.0
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
One Suggestion Here
• maybe too slow adjustment
• Not enough RER change
– sensitivity analysis in other parameter
– q and h
• elasticity among tradable/ btw. T and NT may help
Questions About Their Scenario 1
• are Japanese investors so stupid? why do
they invest their assets in the US if ru<rw
– They might have been, but...
• possible explanations for having US asset
– Risk – Return trade-off? US asset is safe?
– vehicle currency > need to hold dollar?
Questions About Their Scenario 2
• why ru<rw ?
• return on each asset group (bond, stock)
was higher in the US than in Japan and
Europe for the last 15 years
– is it realistic for next ten years?
• if “exorbitant privilege” is true among
developed country, it is probably asset
compositions rather than return discount
• risk tolerance?
What Drives Exchange Rate?
US Real Effective Exchange Rate
135
131.24
130
2 years
Feb 02-Jan 04
125
120
5 years
Jan 73-Oct 78
115
110
116.75
3 years
Mar 85-Jan 88
108.21
105
100
95
90
88.78
85
82.58
82.63
80
75
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
What Do We Need?
• probably emerging countries (or call Asia
as emerging countries) to generate ru>rw
and provide nice model; shocks
– risks in Asia are high?
• endogenous portfolio allocation with
exogenous “r”
• better to have endogenous “r”
–
Engel and Matsumoto (2006) Though our model is too simple in other dimensions
• FX as an asset
Conclusion
• valuation effect is important
– nice analysis for policy circle
– but need more analysis on portfolio choice
• remind me of the need to develop realistic
DSGE model with international portfolio
choice