Transcript Global Imbalances Ford Ramsey, Claire Huang, and

Global Imbalances
Ford Ramsey, Claire Huang, and Prof. Yang
What Global Imbalances?
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Saving Behavior
Investment Behavior
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Portfolio Behavior
Global Imbalances in Connection
with the Current Financial Crisis
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Global imbalances had little to do with the crisis,
which was mainly caused by lax financial
regulation on the part of the United States.
Global Imbalances were the prime cause for the
economic crisis as they depressed interest
rates which incentivized investors to make risky
investments.
Global imbalances and lax financial regulation
in the United States worked in concert to create
the current financial crisis.
Evidence and Visual Aids
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There is a sustained increase in the dispersion of current account balances
worldwide starting in 1996, with a brief downturn in 2001-02.
• The nature of global imbalances imbalances has changed through time. For
instance, Japan was the main counterpart to U.S. deficits during the 1990s,
and China took over this role with large surpluses in the early part of the 21st
century.
Three Important Economic Periods
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Differences in Perceived Profitability, 1996-2000.
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Declining U.S. Saving, 2001-2004.
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Asset Booms and Busts, 2005-2008.
Savings Rate
Chinese Saving Statistics
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China
– 1981: 20%
– 1988: 30%
– Present: remain at 40%
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GDP rate increased 10% yearly.
A Brief Summary
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Rising current account deficits in the United
States particularly, with rising surpluses in
China, the Middle East, and other Asian
markets.
Significant declines in household savings in the
United States with an increase in household
savings in developing countries.
An Argument for Positive Feedback
Behavior Precipitating Crisis
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Rising U.S. deficits and surpluses in Asian countries and
the Middle East spawned a savings glut in developing
countries. Capital flowed to advanced countries. (primarily
the U.S.) This caused interest rates to drop nearly
worldwide.
The drop in interest rates led to a boom in housing
investment, and less household savings on average as
U.S. investors moved to take advantage of the economic
situation.
Imbalances fed consumption which fed imbalances, and
so a positive feedback loop was initiated.
How Imbalances Affect Crisis
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Imbalances in savings, investment, and portfolios led to a situation
where real interest rates were driven down and assets increased in
price.
With easy sources of capital from surplus nations, and low interest
rates, American households and investors were more willing to
continue expanding consumption and the housing boom, as well as
making riskier decisions in the instruments they used.
All in all, imblances led to a unique combination of low interest rates,
low inflation, housing appreciation, lax lending practices, credit
expansion, and strong incentive towards high leverage.
Eventually, interest rates in the United States had to adjust as the
deficit moved to increasingly large amounts. As various investment
instruments adjusted as well, investors found themselves looking at a
decrease in asset prices and a simultaneous increase in the real
interest rate.
What Can Be Done?
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The U.S. Government can reign in spending
and lower the deficit, while the Chinese
government brings its current account surplus
into balance.
Structural changes in Japan and Europe to
break out of a low investment situation that
relies on exports.
Stimulation of Chinese domestic consumption.
Information Shocks and Macroeconomic
Imbalance in the World Economy
A discussion
1.Introduction
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1.1Definition of the Imbalance of World Economy
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(1)Deficit or Surplus of BOP in a country
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(2)changes of Regional Economy
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(3)Waves of Global Economy
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For the time being, majority of economists and politician
focus on the issue at a perspective of macroeconomic
imbalance of one nation. That is to say, most of them
define the imbalance of World Economy as (1).
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1.2Forms of Macroeconomic Imbalance in the World Economy
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(1)Trade Imbalance
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(2)Financial imbalance
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(3)Investment Imbalance
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1.3Different interpretation of the reasons for imbalances
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(1)unfair Trade Practices
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(2)decline of Competitiveness
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(3)poor management practices
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(4)old-fashioned labor-relations procedures
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(5)lack of entrepreneurship
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(6)fiscal policies
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(7)monetary policies
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(8)investment cycles
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2.The importance of Information Shocks: some cases
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Case 1:Enron nightmare and the burst of .com bubble
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--Enron before and after 2001
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-- The world's fifth largest accounting firm Arthur Andersen and the Enron Corporation as a
financial audit report, neither Enron audit of false profits, and it has not found its huge
debts. This year, in June, Arthur Andersen audit work because of a fraud by the United
States Securities and Exchange Commission fined the 7 million US dollars.
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--direct consequences and indirect consequences
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Case 2:East Asian Financial Crisis in 1997
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Case3:Toyta’s recalling and its market share in U.S. and
other countries
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3.Modelling:Information shock as the reason for imbalances
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3.1Mothod 1:based on an extensive GNP model
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A simple GNP model:
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C+S+T+M(From supply side)
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Y=C+I+G+X(From demand side)
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an extensive GNP model
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From supply side：Y=C+S+T+M+Rf+Wf
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Where,Rf–incomes of foreign investors in home country;Wf –wages of foreigners
in home country。
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From demand side：Y=C+I+G+X+If+Wh
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Where,I
f-incomes
from
oversea’s
Wh—wages
of residents
in foreign
countries.
Y
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C
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G
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X
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f
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W
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M
R
f 6
W
f
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Consider the information shock as parameters,then,
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3.2Method 2:Based on Structural equations
See the attached figure
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4.Data and Tests of the models
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Further studies
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5.Conclusions and implications of policy
To think about
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