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... While that paper does not cast this as a question of consumption versus investment-related current account deficits, it adds the investment share of GDP as an explanatory variable and finds that a high share leads to higher post-reversal growth. A less directly related paper is Milesi-Ferretti and Razin (2000) which, among other things, looks at determinants of current account reversals and finds that high -----4 E.g., Papers arguing in favor of sustainability include Hausman and Sturzenegger (2006) who note the relatively strong position of net liabilities. Papers arguing against include Edwards (2005) and Gros (2006) who questions the quality of data on liabilities. ...
Conference Paper
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This paper investigates common determinants of fiscal crises using a standard Early Warning System (EWS) approach, with a particular focus on the role of the financial sector. We find that the probability of a fiscal crisis decreases with the level of domestic credit (as a share of GDP), but that at very high levels of credit it starts to increase. The critical threshold above which an increase in the level of credit signals an increase in the likelihood of a fiscal crisis, appears to be country (or group) specific, rather than an absolute level valid across all countries as previous research on this issue seemed to suggest. The paper also presents some preliminary results suggesting that, to determine a country’s vulnerability to fiscal crises, it might play a role whether the credit is provided to the real economy (e.g., households, non-financial corporations) as opposed to the financial sector. In fact, after controlling for the stage of financial development of a country, the likelihood of a fiscal crisis decreases with the ratio of credit to the real economy (as a share of GDP) and increases with the ratio of credit to the financial sector (as a share of GDP). Consistent with previous findings in this literature, we find that higher levels of gross government debt, larger budget deficits, lower GDP growth and a loss of competitiveness (at least for more advanced economies) increase the likelihood of a fiscal crisis. We also find that countries with larger negative Net International Investment Positions (NIIPs) are more vulnerable to fiscal crises, especially if the level of debt liabilities (as opposed to FDIs) is large. This paper does not, however, account for other important factors that are likely to have an impact on a country’s vulnerability to a fiscal crisis. These include the strength and credibility of domestic institutions, the potentially stabilising role of an independent monetary policy, progress made on structural reforms; and other political economy factors. These limitations inevitably call for some care in assessing the key policy implications of this paper.
... Hausmann and Sturzenegger (2006) apply 5% as the capitalization rate. 13 Contrary toCurcuru, Thomas and Warnock (2013), this paper excludes the valuation adjustment (capital gain) in the calculation of returns.14 ...
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The aim of this paper is to examine the ‘dark matter’ assets in the external sector of the United States in the period 1999:Q1-2018:Q3. The paper investigates data on the balance of payments and international investment position for the US and a group of 18 economies. The research reveals that the US is a privileged economy with respect to foreign income on international investments. The rates of return on its foreign assets are relatively higher, and the costs incurred on its foreign liabilities relatively lower, as compared with the benchmark group. This special privilege of the US relates to equity investments, especially foreign direct investments. Based on prevailing income differentials substantial ‘dark matter’ assets of the US are estimated. Recognising such ‘dark matter’ leads to the conclusion that the US is a foreign creditor, not debtor. The findings shed light on the puzzle as to why the US has a continuing ability to sustain its external position despite mounting foreign liabilities.
... Hausemann and Sturzenegger argue that the global financial market has reached a new equilibrium where investors have changed how they view liabilities (Hausemann & Sturzenegger, 2006). As barriers to trade and investing become lower in a global market, net investor nations are motivated to integrate and improve trade relationships with their borrowers in order to better manage and protect their foreign assets. ...
Thesis
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This dissertation analyzes selected policies designed to attract foreign direct investment (FDI) as a means of economic growth. The focus is on multinational corporations (MNCs) because most foreign direct investment is done by MNCs. The dissertation first shows the effects that the presence of MNCs has on economic growth before examining tradeoffs between direct costs (i.e., transportation and production costs) and policy factors in attracting MNC FDI. Essays 1, “Multinational Corporations and Their Effect on Gross Domestic Product” and 2, “Competing for Innovation: The Economics of Knowledge Acquisition” examine how FDI in combination with socioeconomic, economic, and policy factors affect the growth of gross domestic product (GDP). The collective results suggest that policies of regionalization drive GDP growth and influence FDI location. Nations that are corporate homes of the largest and most internationalized MNCs benefit from policies of regionalization as they aid the global expansion of their corporations. Importantly, these two essays provide empirical evidence of the value transfer of MNC internationalization back home and of the importance MNC concentration at the national level. The presence of MNC networks provide knowledge and aid in the innovative capacity of both developed and developing countries. Both essays find that GDP growth driven by MNC activity has been stronger in the developing world since 2000. The two essays contribute to the globalization literature by providing empirical evidence of the increasing importance of emerging markets in the new economy, the role of MNCs in that increasing importance, the political and diplomatic implication of these related developments, and the policies nations currently employ to stay competitive in a turbulent environment. Essay 3, “Fleeing Regulation: Pollution Havens in Textile Manufacturing” provides an example of the importance of regulatory policy by examining the effect of a policy change on FDI flows in the context of the garment sector. The results indicate that the removal of the quota system in the international trade of garments increased FDI in nations with permissive environmental policies, which in turn, has contributed significantly to leading to toxins and pollutants in local ecosystems. The dissertation provides empirical evidence that under globalization nations compete for FDI through policy. The extant literature argues that globalization is a product of two sets of factors: (1) reductions in ‘spatial friction’ (i.e., decreasing transportation, information, and organization-of- production costs), and (2) reductions in trade barriers, both in terms of border restrictions and in terms of domestic policies affecting foreign and domestic direct investment. The major contribution of the dissertation is in providing empirical evidence that under globalization nations compete for FDI by creating attractive regulatory environments for MNCs. There are social costs to be born in the competition for FDI and this dissertation shows that the nations that are corporate homes to the world’s largest MNCs are often better positioned to absorb costs associated with knowledge sourcing as well as export pollution costs to their more lenient trading partners.
... Th ose nations that had larger trade defi cits also observed higher rates of GDP growth. Hausemann and Sturzenegger argue that the global fi nancial market has reached a new equilibrium where investors have changed how they view liabilities (Hausemann & Sturzenegger, 2006). As barriers to trade and investing become lower in a global market, net investor nations are motivated to integrate and improve trade relationships with their borrowers in order to better manage and protect their foreign assets. ...
Chapter
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The model from Chapter 4 is expanded to an 11-year time series to examine further the relationship between accelerated GDP growth in the developing world and the FDI activity of MNCs. Additional MNC metrics are included, such as MNC merger and acquisitions per nation, as well as a scale of regional integration of trade blocs. An analysis of the benefits of belonging to a trade bloc is offered in light of the benefits of investing globally. Evidence of knowledge sourcing in this model is discussed.
... Hausmann and Sturzenegger (2005Sturzenegger ( , 2006aSturzenegger ( , 2006bFirstly, by investing abroad, the U.S. had unmeasured exports of services such as brand recognition, know-how, expertise and research and development. Secondly, by providing the reserve currency of world, the U.S. exports liquidity service for the world economy and earn seignorage revenue for this service. ...
Thesis
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The aim of this thesis is to analyze and evaluate the dominance of the dollar and its sustainability in the international monetary system in the light of recent literature and relevant statistical data. Considering the determinants of an international currency, this thesis focuses on the linkages of the dominance of the dollar with the challenge of the euro as an alternative international currency, the current account deficit of the U.S. and foreign exchange reserve accumulation and reserve diversification decision of foreign central banks. The analysis on these determinants indicates that the U.S. dollar is facing many challenges and may face further challenges in sustaining its dominance as an international currency. Given the significance of the U.S. economy and dominance of the dollar as an international currency, the findings of this study indicate that although the euro has not much potential to surpass the dollar as an international currency in the short-term, it is more likely for the international monetary system to witness the existence of multiple international currencies and decline in the degree of the dominance of the dollar in the 21st century.
... In a series of articles Hausmann and Sturzenegger (2005, 2006a, 2006b) (HS hence), we have argued that this concern may be misguided. Our work starts by pointing that such large increase in debt needs to be reconciled with a rather contradictory fact: that what the US economy pays on its net foreign position seems to have been surprisingly constant in spite of the measured increase in net foreign liabilities 2 . ...
Article
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This paper clarifies how dark matter changes our assessment of the US external imbalance. Dark matter assets are defined as the capitalized value of the return privilege obtained by US assets. Because this return privilege has been steady over recent decades, it is likely to persist in the future or even to increase, as it becomes leveraged by an increasingly globalized world. Once this is included in future projections of US current accounts, the US external position looks much more balanced than depicted in official statistics.
... toring the balance in U.S., European and Asian current accounts would imply a 30 percent depreciation of the dollar against the Euro and a 35 percent depreciation against a basket of Asian currencies respectively. But as in the case with the renmimbi, there is no clear consensus about the size (and even sign) of the misalignment of the US currency. Hausmann and Sturzenegger (2006) for instance arrive to the conclusion that there is no problem of sustainability with the US current account. The reason behind this divergent views lies in a concept that the authors call dark matter, i.e. attributes present in certain assets (the U.S. dollar in this case) that can not be properly measured. Corrected for the amount of ...
Article
It is traditionally assumed in finance models that the fundamental value of an asset is known with certainty. In this paper we argue that this is an appealing sim-plifying assumption but it is undoubtedly not based on empirical evidence. We offer a simple theoretical model of the exchange rate in which agents dispose of biased estimates of the underlying fundamental rate. Despite the fact that only fundamen-talist traders operate in the market the model belongs to the heterogenous agent literature, as traders have different estimates/beliefs about the fundamental rate. Most interesting the model shows that in without chartists, cyclical fluctuations of the exchange rate that are characterized by volatility clustering and extreme returns can still be obtained. Frank Westerhof for their valuable comments. I am also indebted to the Research Foundation -Flanders (FWO) for financial support.
... Finally, the last and growing strand of the literature is motivated by the positive net investment income flows to the US, suggesting that US foreign assets perform better than US foreign liabilities at least in terms of dividends. Hausmann and Sturzenegger (2006), Gourinchas and Rey (2007a,b) and Pavlova and Rigobon (2010) argue that the valuation of US net foreign assets (NFA) has a stabilizing effect on the current account. ...
Article
Our paper investigates whether the valuation effect caused by a large risk premium and a low risk-free rate can help to explain the enormous US current account and trade deficit observed in the past decade. To answer this question, we set up an endowment growth model in which investors are endowed with heterogeneous trading technologies. In our model, the average US investors load up more aggregate risk by investing in a risky asset abroad and issuing a risk-free asset. Thanks to the large risk premium as well as the low risk-free rate, the US can sustain a long-run trade deficit even as a debtor country. Quantitatively, we find that the valuation effect caused solely by the high risk premium and the low risk-free rate in our model, which is calibrated to match the external assets and liabilities of the US economy, can account for more than half of the observed trade deficit and current account deficit. Our results suggest that the current US trade deficit might not necessarily lead to net export increases or dollar depreciation in the future.
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The aim of the article is to conduct an empirical analysis of the impact of aggregate and disaggregate private capital flows on economic growth in eleven MENA countries between 1980 and 2018. Unlike prior empirical studies, the fixed effect panel quantile approach developed by Canay (2011) is implemented. Findings suggest that there is a significant difference in the effects of private capital flows on economic growth across lower and higher quantiles. More specifically, the effects of total private capital flows, foreign direct investment flows, portfolio flows and debt flows are positive and statistically significant only for low and medium quantiles, indicating that the enhancing impact of private capital flows in terms of economic growth is only confirmed in countries with relatively low and medium growth rates. Moreover, debt flows affect economic growth in countries recording high growth rates, stressing the importance of financial development in routing those flows into the most productive projects in the economy.
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The objective of this study was to model the behavior of the Current Account Balance of Payments (CAB) for Indonesia. It also calculated the conditional Value at Risk (VaR) as a measure of the risk level of the CAB. An ARDL (Autoregressive Distributed Lag) model and an EGARCH (Exponential Generalized Autoregressive Conditional Heteroskedasticity) model were used to estimate the CAB behavior for the annual data 1985-2018. The research found that exchange rates, growth of gross domestic product, inflation, total reserves, and unemployment are essential in determining the behavior and volatility of the CAB. The VaR calculated based on the conditional standard deviation that resulted from the EGARCH estimation shows that most of the time the Indonesian CAB is in safe conditions. However, the VaR has been violated by the actual CAB several times, and the violations coincide with various macroeconomic shocks. The Central Bank of Indonesia could calculate the VaR threshold using this method to evaluate the risky nature of the current account deficit. This study provides an alternative procedure to analyze and assess the current account balance risk to mitigate the impact of macroeconomic shocks.
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We construct a metric of geoeconomical distance from international investment and world trade to assess the risk of interstate conflict. Geoeconomical distance measures the mutual excessive acceptance of investments and exports between two countries. We show that a country’s distance to the US and China is a significant predictor of its involvement into interstate conflict(s). Splitting the sample into two periods, we find that countries approaching China at the cost of their proximity to the US are confronted with significantly higher risk of interstate conflict in the early post-Cold War period, as are countries located at the outskirts of the unipolar system as measured by their distance from the US. In the later period, a country’s concurrent motion toward China and away from the US, unlike the earlier period, does not increase its risk to be involved in interstate conflict(s). Furthermore, countries located at the periphery of the nascent Sino-US bipolar system have lower geopolitical risk than those residing close to their respective centers.
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In previous work we have defined "dark matter" as the difference between the capitalized value of net investment income of a country and the official measure of its net foreign assets. In this paper we estimate dark matter assets for Latin American countries. We find that official current account dynamics follow reasonably well the evolution of dark matter inclusive net foreign assets in the region over relatively long periods such as the last two decades. However in the period 2002-2004 official statistics suggest a current account surplus that becomes a deficit of close to 300 billion once dark matter is included. This happens because official numbers underestimate current account imbalances for commodity producers who experienced significant capital losses as a result of the recent commodity boom.
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It is traditionally assumed in finance models that the fundamental value of an asset is known with certainty. In this paper we depart from that assumption. We propose a simple model of the exchange rate in which agents have biased and unbiased beliefs about the fundamental rate. We show that such a model produces waves of optimism and pessimism unrelated to the underlying fundamental value. In addition, the model shows that in a world characterized by the existence of heterogeneous beliefs about the fundamental, exchange rate movements can be remarkably complex even if only fundamentalist traders operate in the market.
Book
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Over the first ten years of its existence, the euro has proved to be more than a powerful symbol of collective identity. It has provided price stability to previously inflation-prone countries; it has offered a shelter against currency crises; and it has by and large been conducive to budgetary discipline. The eurozone has attracted five new members in addition to the initial eleven, and many countries in Europe wish to adopt it. The euro has also been successful internationally. Even though research presented in this volume confirms that it has not rivaled the dollar's world currency status, it has certainly become a strong regional currency in Europe and the Mediterranean region. Some countries in the region have de facto adopted it, several peg to it, and many have become at least partially euroized. However, the euro's impressive first decade is likely to be followed by a much more difficult period. The present financial crisis is posing at least two important challenges: real economic adjustment within the euro area and maintenance of fiscal and financial stability without a central government authority capable of taking appropriate financial and fiscal decisions in difficult times. This book is the product of a joint conference held in 2008 by the Peterson Institute for International Economics and Bruegel. It is edited by Bruegel Director Jean Pisani-Ferry and then-PIEE Deputy Director and current Bruegel board member Adam Posen. The papers and remarks in this volume demonstrate that the euro has proved to be attractive as a fair weather currency for countries and investors well beyond its borders. But it remains to be seen whether it is equipped to also succeed as a stormy weather currency. Contributors: Joaquín Almunia, Maria Celina Arraes, Leszek Balcerowicz, C. Fred Bergsten, Lorenzo Bini Smaghi, Kristin J. Forbes, Linda S. Goldberg, C. Randall Henning, Mohsin S. Khan, Antonio de Lecea, Erkki Liikanen, Philippe Martin, Thomas Mayer, André Sapir, Dominique Strauss-Kahn, Lawrence H. Summers, and György Szapáry. For more information on the events related to the book launch, please consult our Research page.
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This paper clarifies how the valuation of hidden assets—what we call “dark matter”—changes our assessment of the U.S. external imbalance. Dark matter assets are defined as the capitalized value of the return privilege obtained by U.S. assets. Because this return privilege has been steady over recent decades, it is likely to persist in the future or even to increase, as it becomes leveraged by an increasingly globalized world. Once this is included in future projections of U.S. current accounts, the U.S. external position looks much more balanced than depicted in official statistics.Business Economics (2007) 42, 28–34; doi:10.2145/20070103
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We examine whether the spread of an exporting strategy can be characterized as a diffusion process using a general framework that accounts for attrition and changes in the pool of potential adopters and allows the diffusion rate to vary according to firm and market characteristics. Our findings indicate that the diffusion of exporting is described well by the internal model of diffusion. Thus, this framework may be useful in modeling the spread of other strategies. The diffusion rate is found to be strongly related both to firm characteristics and to past adopter performance. Copyright 2009 The Author 2009. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.
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En trabajos anteriores, hemos definido «materia escura» como la diferencia entre el valor capitalizado del rendimiento neto de la inversión de un país y la medición oficial de sus activos externos netos. En este artículo, calculamos los activos de materia oscura para los países de América Latina. Constatamos que la dinámica oficial de las cuentas corrientes sigue de forma aceptable la evolución de la materia oscura, incluidos los activos externos netos de la región a lo largo de periodos relativamente largos (como las dos últimas décadas). No obstante, en el periodo comprendido entre 2002 y 2004, las estadísticas oficiales sugieren un superávit en las cuentas corrientes que se transforma en un déficit del orden de 300.000 millones al incluir esta materia oscura. Esto sucede porque las cifras oficiales subestiman los desequilibrios de las cuentas corrientes para los productores de bienes que hayan sufrido pérdidas de capital significativas como resultado el reciente boom de este tipo de bienes.
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In a series of papers we have developed the notion that net foreign assets could be better approximated by capitalizing the net investment income line of the balance of payments statistics. Hidden assets or changes in financial costs may change the net return of net foreign assets even when the valuation of assets remains unchanged. By capitalizing the net investment income a more realistic picture emerges on the true burden or return of net foreign assets. This paper estimates external positions for East Asian economies using this methodology and compares the results with that of official accounts. We find that, until the late 1990s, net investment income increased relatively little, signaling that net foreign assets had not grown as suggested by the large current account surpluses of these countries. This is consistent with the fact that the region had attracted large amounts of foreign direct investment, for which the transfer of technology and knowledge are not accurately captured by the valuation of the foreign asset position. Since 2002, however, the trend has reversed, indicating much larger surpluses than officially registered. We discuss individual country cases.
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Current account statistics may not be good indicators of the evolution of a country's net foreign assets and of its external position's sustainability. The value of existing assets may vary independently of current account flows, so-called ‘return privileges’ may allow some countries to obtain abnormal returns, and mismeasurement of FDI, unreported trade of insurance or liquidity services, and debt relief may also play a role. We analyse the relevant evidence in a large set of countries and periods, and examine measures of net foreign assets obtained by capitalizing the net investment income and then estimating the current account from the changes in this stock of foreign assets. We call dark matter the difference between our measure of net foreign assets and that measured by official statistics. We find it to be important for many countries, analyse its relationship with theoretically relevant factors, and note that the resulting perspective tends to make global net asset positions appear relatively stable. — Ricardo Hausmann and Federico Sturzenegger
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In 1988-97, the average rate of return on assets (ROA) of foreign-owned nonfinancial companies, at 5.1 percent, was 2.2 percentage points below that of U.S.-owned companies; over the period, the ROA gap narrowed to about 1 percentage point in 1997. Among several factors that may help explain the lower ROA of foreign-owned companies, age and market share were found to be significant, and industry mix and shifting of profits outside the United States using transfer prices were found to be relatively insignificant. These findings are based on newly developed estimates of the rate of return for foreign-owned U.S. nonfinancial companies that are disaggregated by industry and valued in current-period prices.
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We focus on the two eras of globalization: “then” (the period 1870 to 1913) and “now” (the period since the 1970s). We look at the special position in the global macroeconomy of the hegemons in each era: Britain then, and the United States now. And adducing historical data to match what we know from the contemporary record, we proceed in the tradition of New Comparative Economic History to see what lessons the past might have for the present.
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The income account of the US balance of payments has so far remained in surplus because of a very large differential in reported earnings on direct investment – US firms seem to enjoy a much higher rate of return than foreign firms in the US. There is little difference in terms of the rate of dividend payments; the difference is due to what is called ‘reinvested earnings’ (earnings minus dividends). Foreign firms report almost no reinvested earnings on their direct investment in the US whereas US firms report substantial reinvested earnings from their direct investment abroad, on average over $100 billion more p.a. than foreign firms report on their US investment. This anomaly is probably due to the desire of foreign firms to minimise their US taxes, whereas US firms do not face tax liabilities if they report high foreign profits to the US authorities. The procedure used to generate the data for reinvested earnings thus has a built-in bias to improve the US current account and – over time – its international investment position. The true picture is likely to be much worse. Reinvested earnings appear in the balance of payments because returns from FDI are measured in a different way than returns from portfolio investment. Returns from FDI are calculated from a mix of firm-level accounting data and broad stock market indices to infer an average capital gain. This procedure will be misleading if, because of the different tax treatment they face, foreign controlled firm in the US report earnings on a different base than other US-owned firms. A more accurate method of measuring the returns from foreign direct investment in the US, by using the same procedure as for portfolio investment (i.e. using only stock market prices), leads to the result that the deficit of the US current account increases by over $100 billion per annum and the US net international debtor position worsens by over a trillion dollars. The latter amount is the sum that, if one believes the official statistics, foreign investors have been willing to forego compared to the alternative of investing in their home country.
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The US international investment position today should in principle be equal to the sum of past current account balances (mostly deficits). However, this is by far not the case even taking into account the balancing item ‘errors and omissions’. Between 1982 and 2004, the US has accumulated a grand total of around $4.5 trillion (thousand billion). (The sum of current account deficits has been about $1 trillion smaller than the amount of net sales of US assets to the rest of the world because of the anomaly in reinvested earning.) Despite this accumulation of deficits the US net international debtor position (IIP) has deteriorated ‘only’ by $2.7 billion (and is now estimated – at the end of 2004, end 2005 figures are not yet available for the US IIP – at ‘only’ around $2.5 trillion). This implies a total of ‘unearned’ gains to the US of around $1.8 trillion during 22 years. The quite detailed data available for a somewhat shorter period (1989-2004) show that only a very small part of this sum, around 10-20%, can be explained by exchange rate and stock market changes. One must thus conclude that the US has acted like a black hole for capital from the rest of the world: one can observe a large amount of investment flowing into the US, but after some time it disappears from the statistics (and foreign investment in the US that takes the form of FDI earns almost no return). The discrepancy arises for a simple reason: the flow data are based on actual flows of payments recorded in the balance of payments. By contrast, the stock data (on the US international investment position) are based on US surveys, which tend to miss out on US assets held by foreigners. This implies that it is likely that the true US net debtor position is significantly larger than officially reported.
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This paper revisits the puzzle of low returns on Swiss Franc assets using a new data set of portfolio holdings of residents and non residents at Swiss banks. The main findings are as follows. First, we find that the return anomaly is present only for fixed income assets and not for equity. Second, it is mostly due to a long run deviation from uncovered interest rate parity, not a deviation from purchasing power parity. Third, it is unlikely that foreign demand for Swiss assets (possibly due to banking secrecy) is driving down returns: This demand is quantitatively small especially for Swiss Franc fixed income instruments. A dynamic factor analysis confirms that foreign demand had almost no impact on Swiss Franc asset prices. Finally, we propose a new explanation for low returns on Swiss fixed income assets, namely the diversification benefits offered by these instruments. Applying reversed portfolio optimization to back out the implied returns reveals that the estimated pattern of this returns conforms very well with the observed pattern.
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This inductive study offers an examination of 23 cases in which informants from firms engaged in large-scale global projects reported unforeseen costs after failing to comprehend cognitive-cultural, normative, and/or regulative institutions in an unfamiliar host societal context. The study builds on the conceptual framework of institutional theory. The findings, which include propositions and a generic narrative model, contribute to theoretical knowledge of how institutional exceptions arise, how they are resolved, and how they typically involve three general phases: ignorance, sensemaking, and response. The findings also articulate the kinds of institutional transaction costs that an entrant incurs in each of the three phases, and the conditions that lead to the growth of these costs. Journal of International Business Studies (2008) 39, 562–588. doi:10.1057/palgrave.jibs.8400370
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It is well known that the uncovered interest rate parity fails in the short run but usually holds in the long run. This paper analyses the long and short run interest rate parity of 10 major OECD currencies and finds that there is a long run failure of the uncovered interest rate parity condition for the Swiss franc. After correcting for exchange rate changes, mean returns on Swiss assets have been significantly lower than in other currencies, an anomaly not found in any other major currency. The long run return differential has been stable over the last 20 years, transitory structural breaks are only found in times of currency turmoil. We suggest that the return anomaly may be due to an insurance premium against very rare catastrophic events, such as a major war. Supporting evidence for this hypothesis comes from two empirical findings. First, we show that the return differential is negatively affected by large unexpected geo-political events. Second we examine historical data on interest rates differentials and show that the abnormally low level of Swiss returns arises after the First World War only.
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The economic emergence of a fixed exchange rate periphery in Asia has re-established the United States as the centre country in the Bretton Woods international monetary system. We argue that the normal evolution of the international monetary system involves the emergence of a periphery for which the development strategy is export-led growth supported by undervalued exchange rates, capital controls and official capital outflows in the form of accumulation of reserve asset claims on the centre country. The success of this strategy in fostering economic growth allows the periphery to graduate to the centre. Financial liberalization, in turn, requires floating exchange rates among the centre countries. But there is a line of countries waiting to follow the Europe of the 1950s/60s and Asia today, sufficient to keep the system intact for the foreseeable future. Copyright © 2004 John Wiley & Sons, Ltd.
Book
The United States has once again entered into a period of large external imbalances. This time the current account deficit, at nearly 6 percent of GDP in 2004, is much larger than in the last episode, when the deficit peaked at about 3.5 percent of GDP in 1987. Moreover, the deficit is on track to become substantially larger over the next several years. This study examines whether the large and growing current account deficit is a problem, and if so, how the problem can be solved. A central policy conclusion of this study is that it is increasingly important that the United States reduce its external current account deficit. This deficit is no longer benign as it arguably was in the late 1990s when it was financing high investment instead of high consumption and large government dissaving.
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This article examines whether there is a flight-to-liquidity premium in Treasury bond prices by comparing them with prices of bonds issued by Refcorp, a U.S. government agency, which are guaranteed by the Treasury. It finds a large liquidity premium in Treasury bonds, which can be more than 15% of the value of some Treasury bonds. This liquidity premium is related to changes in consumer confidence, the amount of Treasury debt available to investors, and flows into equity and money market mutual funds. This suggests that the popularity of Treasury bonds directly affects their value.
Book
Why isn't the whole world as rich as the United States? Conventional views holds that differences in the share of output invested by countries account for this disparity. Not so, say Stephen Parente and Edward Prescott. In Barriers to Riches, Parente and Prescott argue that differences in Total Factor Productivity (TFP) explain this phenomenon. These differences exist because some countries erect barriers to the efficient use of readily available technology. The purpose of these barriers is to protect industry insiders with vested interests in current production processes from outside competition. Were this protection stopped, rapid TFP growth would follow in the poor countries, and the whole world would soon be rich. Barriers to Riches reflects a decade of research by the authors on this question. Like other books on the subject, it makes use of historical examples and industry studies to illuminate potential explanations for income differences. Unlike these other books, however, it uses aggregate data and general equilibrium models to evaluate the plausibility of alternative explanations. The result of this approach is the most complete and coherent treatment of the subject to date.
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We construct estimates of external assets and liabilities for over 140 countries over the period 1970-2004. We describe our estimation methods and present some key features of the data, both at the country and at the global level. We focus in particular on trends in net and gross external positions, as well as on the composition of international portfolios, distinguishing between foreign direct investment, portfolio equity investment, foreign exchange reserves, and external debt. We also document the existence of a “world net foreign asset discrepancy” (the stock counterpart to the world current account discrepancy) and identify the asset categories that account for this discrepancy.
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This paper presents a detailed framework and analysis to address whether the US is on track to becoming a society of "sharecroppers," paying a large and growing share of income to foreign owners of US assets, or rather is more likely to continue as a society of "shrewd capitalists" with the cost of servicing international debt remaining relatively low and manageable despite growing international debt. Various scenarios illustrate the reliability of the modeling framework and show how alternative future paths for key variables affect the outcomes. The relationships determining the international flows and relative debt levels-including relative rates of return, asset portfolio compositions, valuation effects, and the outlook for an improving US trade position-indicate that a manageable and sustainable outlook is more likely than often considered to be the case. Results also show, however, the extent to which the outlook is vulnerable to the loss of "exorbitant privilege." Copyright © 2007 The Author; Journal compilation © 2007 Blackwell Publishing Ltd.
Article
This paper discusses the methodologies employed in the U.S. international economic accounts, in valuing direct investment in prices of the current period. Under international standards, all of the components of the international investment position should reflect current period prices, rather than historical cost or book values. Virtually all of the categories in the international investment position accounts except direct investment positions can be directly estimated in prices of the current period with reference to readily observable market prices. For example, the value of positions in portfolio investment securities, gold, loans, currencies, and bank deposits can be directly estimated based on face values or market prices of recent transactions. In contrast, direct investment positions typically involve illiquid ownership interests in companies that may possess many unique attributes - such as customer base, management, and ownership of intangible assets - whose value in the current period are difficult to determine, because there is no widely accepted standard for revaluing company financial statements at historical cost into prices of the current period.
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I modify the uniform-price auction rules in allowing the seller to ration bidders. This allows me to provide a strategic foundation for underpricing when the seller has an interest in ownership dispersion. Moreover, many of the so-called "collusive-seeming" equilibria disappear.
Article
This paper argues that current account statistics may provide a poor indication for the real evolution of a country’s net foreign assets. This may be due to a series of factors including the mismeasurement of FDI, unreported trade of insurance or liquidity services and debt relief. Because of these problems we suggest estimating net foreign assets by capitalizing the net investment income and then estimating the current account from the changes in this stock of foreign assets. We call dark matter the difference between our measure of net foreign assets and that portrayed by official statistics. We find dark matter to be important for many countries and that it relates to FDI flows, domestic volatility, and debt relief. We also find that, once dark matter is taken into account, global net asset positions appear to be relatively stable. In particular, the exports of dark matter of the US appear to be fairly steady and large enough to keep the US net asset position stable, casting doubts on the need for a major adjustment of the dollar or a large rebalancing of the global economy. [Jointly published as Center for International Development Working Paper No. 124 and KSG Faculty Research Working Paper Series RWP06-003.]
Rare Disasters and Asset Markets in the Twentieth CenturyDark Matter or Cold Fusion?', Global Economics Paper No. 136, Goldman Sachs. r 2006 The AuthorsAn Equilibrium Model of ''Global Imbalances'' and Low Interest Rates The United States as a Debtor Nation
  • Robert J Barro
  • Harvard Mimeo
  • University
  • Buiter
  • Willem
Barro, Robert J. (2005), 'Rare Disasters and Asset Markets in the Twentieth Century', Mimeo, Harvard University. Buiter, Willem. (2006), 'Dark Matter or Cold Fusion?', Global Economics Paper No. 136, Goldman Sachs. r 2006 The Authors. Journal compilation r 2006 Blackwell Publishing. Ricardo Hausmann and Federico Sturzenegger Caballero, R., E. Farhi and P. O. Gourinchas (2005), 'An Equilibrium Model of ''Global Imbalances'' and Low Interest Rates', Mimeo, MIT, September. Cline, William (2005), The United States as a Debtor Nation. Institute for International Finance, Washington DC.
The Income Implications of Rising US International Liabilities', Current Issues in Economics and Finance. Federal Reserve Bank of
  • Higgins
  • Thomas Mathew
  • Cedric Klitgaard
  • Tille
Higgins, Mathew, Thomas Klitgaard and Cedric Tille (2005), 'The Income Implications of Rising US International Liabilities', Current Issues in Economics and Finance. Federal Reserve Bank of New York, Vol. 11, No. 12, December pp 1–9.
Valuing the Direct Investment Position in US Economic AccountsInternational Portfolio Holdings and Swiss Franc Returns
  • R Kozlow
Kozlow, R. (2002), 'Valuing the Direct Investment Position in US Economic Accounts'. Available at http://www.bea.gov/bea/papers/Kozlow-Val.pdf Kugler, P., and B. Weder (2004), 'International Portfolio Holdings and Swiss Franc Returns', Mimeo, University of Mainz.
Intangible Capital and Economic Growth', Finance and Economics Discussion Series No.24, Federal Reserve BoardThe Revised Bretton Woods System
  • Corrado
  • Charles Carol
  • Daniel Hulten
  • Sichel
Corrado, Carol, Charles Hulten and Daniel Sichel (2006), 'Intangible Capital and Economic Growth', Finance and Economics Discussion Series No.24, Federal Reserve Board, Washington, DC. Dooley, Michael, David Folkerts-Landau and Peter Garber (2004), 'The Revised Bretton Woods System', International Journal of Finance and Economics, 9(4), 307–13.
The United States as a Debtor Nation Institute for International Finance. Q5 Q6 r 2006 The Authors
  • William Cline
Cline, William. (2005), The United States as a Debtor Nation. Institute for International Finance. Q5 Q6 r 2006 The Authors. Journal compilation r 2006 Blackwell Publishing.
An Equilibrium Model of "Global Imbalances" and Low Interest Rates
  • R Caballero
  • E Farhi
  • P O Gourinchas
Intangible Capital and Economic Growth
  • Carol Corrado
  • Charles Hulten
  • Daniel Sichel