macroeconomic diagnostics ( mdsx) module 9 · nx ca. not comprehensive ... source: bank of...

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Module

The External Position

Macroeconomic Diagnostics (MDSx)9

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Course:9

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1

About Module 9

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MDSx

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Opportunities and Risks of Globalization

A country’s position with respect to the rest of the world: trade in goods and services, borrowing/lending

Reflection of underlying macroeconomic concerns

Adverse shocks

20170525 JT: Ellen suggests you do

not show this and just speak to the

camera.




Insert visual content to the left.

Topic Linkages

20170525 JT: Ellen suggests you do

not show this and just speak to the camera. However she agrees with

me that this would be okay.

Module:Section:



Course:9

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A Review of Balance of Payments

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MDSx

Module:Section:



Course:9

2

2

Net Exports to the Current Account

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MDSx




From Net Exports to the Current Account

National Accounts – Constant (or chained) prices:

NX X IM= −20170525 JT:

Added “From” in the title.






NX CANOT

Comprehensive

National accounts – Real domestic currency

Comprehensive

Balance of Payments Nominal units –US$

20170525 JT: Added “From” in

the title.






Primary and Secondary IncomeCA NX= +

Primary Income

Secondary Income

Cross-border compensation of employees Investment Income

Transfers

20170525 JT: Added “From” in

the title.

Made “and” a “+” in the equation.

Added a layer over your content to

update the issue.

Primary + Secondary Income

Module:Section:



Course:9

2

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Net Exports to the Current Account in Excel

Excel

MDSx

Placeholder to insert full canvas diagram or chart.(Draft in PowerPoint and within the guides.)EXCEL

Module:Section:



Course:9

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Appropriate Current Account Balance

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MDSx

Removed slides from this version as you indicated you don’t need

them.

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Course:9

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Savings-Investment Perspective

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MDSx

OK, aim 6-7 minutes. I’ve

removed the “/” from the title and made it “-” as per Ellen’s suggestion.






Domestic absorption

NX Y C I G= − − −






Primary and Secondary IncomeGNDI Y≡ +

CA GNDI C I G= − − −

Gross National Disposable IncomeGNDI ≡

Primary + Secondary Income 20170525 JT:Made “and” a “+” in the equation.

Added a layer over your content to

update the issue.






( )S GNDI C G cons= − −

CA S I= −

National Residual BoPAccountsMeasure

S CA I= +

Residual measure of savings:






0CA >

Investment funded by saving from rest of the world.

Investment in ROW funded by our saving.

0CA <





Concerns about Current Account Deficit:

Will foreign savers be repaid?

Are investment projects of sufficient quality?

20170525-Generally,

questions are not good in the slides. Flexibility, right?

State the questions as they appear, checking them off. Then

answer them. Ex. Q1, check, answer. Q2, check, answer.





Concerns about Current Account Surplus:

High Savings

Low confidence; uncertainty; pension systems doubts

Low Investment

Political uncertainty; structural impediments




Insert visual content to the left.20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Thailand: Savings and Investment/GDP (in percent)

Savings

Investment

Source: Bank of Thailand / Haver

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Thailand: Current Account/GDP(in percent )

Source: Bank of Thailand / Haver

Module:Section:



Course:9

3

2

Savings/Investment Perspective in Excel

Excel

MDSx

Module:Section:



Course:9

3

3

Twin Deficits

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MDSx

20170525-Updated the title in these to “Twin Deficits – Fiscal and External”





Twin Deficits – Fiscal and External

CA S I= −P P G GCA S I S I= − + −

P P

Overall Balance from Fiscal

CA S I OB= − +






-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Q1.2005 Q1.2006 Q1.2007 Q1.2008 Q1.2009 Q1.2010 Q1.2011 Q1.2012 Q1.2013 Q1.2014 Q1.2015 Q1.2016

Indonesia: Government Balance and Current Account (in percent of GDP)

Current Account

Gov't Overall Balance

Source: Bank of Indonesia / Haver





Warning Signs:

Deterioration in current account reflects deterioration in public

S-I gap

Unsustainable public spending boom

Returns in public sector may be low

Module:Section:



Course:9

3

4

Fiscal and External Deficits in Excel

Excel

MDSx

Module:Section:



Course:9

3

5

Terms of Trade

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Terms of Trade





Terms of Trade

$ $ * ( )XX P VOL X=

$ $ ( )IMIM P VOL IM=

Small country:Prices determined in world markets

Bigger country:Can affect world price





Terms of Trade

$

$ External Terms of Trade (TOT)X

IM

PP

=

60

70

80

90

100

110

120

130

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Terms of Trade by region(index, 2010=100)

Western Hemisphere Europe Middle East Asia Africa

Source: Haver / IMF staff calculations




Terms of Trade

Impact of price changes on value (in DOLLARS):

$ $Export side impact =( % )*X initialP X∆

$ $Import side impact =( % )*IM initialP IM∆

Module:Section:



Course:9

3

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Terms of Trade in Excel

Excel

MDSx

Module:Section:



Course:9

3

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Current Account Balance in Excel

Excel

MDSx

Module:Section:



Course:9

4

1

The Business Cycle and International Trade

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MDSx





Trade and output are interdependent:Exports rise when trading partner output rises

Imports rise when domestic output rises

Cyclical adjustment – similar to fiscal balance






100*( 1)tP

t

YyY

= −

1100

tP

t

Y yY

= +





Import Adjustment:,

1100

IM YCA

t tyIM IM

ε = +

,

1100

IM YCAt t

yIM IMε−

= +

, elasticity of imports with respect to output gapIM Yε =

Observed Unobserved





Trading partner output gap:

1 1 2 2 3 3 ....TPX X Xy y y yω ω ω= + + +

( ) 1( ) 100

TPtPt

Y tp yY tp

= +

1 2 3 .... 1X X Xω ω ω+ + + =

Export weights normalized to one





Export Adjustment:

, ( ) elasticity of exports with respect to trading partner output gapX Y TPε =

, ( )

1100

X Y TPTPCAt t

yX Xε−

= +

, ( )

1100

X Y TPTPCA

t tyX X

ε

= +

Observed Unobserved





Cyclically Adjusted Net Exports:

CA CA CAt t tBGS X IM= −

Module:Section:



Course:9

4

2

Current Account Cyclical Adjustment in Excel

Excel

MDSx

Module:Section:



Course:9

4

3

The Real Exchange Rate

Standard

MDSx




The Real Exchange Rate (RER)

Real cost of domestic currency in terms of foreign currency

A market signal for resource allocation:

Producers – Export versus Home Goods

Purchases – Imports versus Home Goods





Bilateral Real Exchange Rate:

Nominal Exchange Rate in units of FC

per unit of LC

Domestic Price Level

Foreign Price Level

*t

ttt P

PEQ =

*tttt ppeq −+=






( ) Primary and Secondary IncomeCA NX RER= +

Net exports sensitive to movements in the RER

Primary and secondary income assumed exogenous

Primary + Secondary Income






90

95

100

105

110

115

-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0%

Rea

l exc

hang

e ra

te in

dex

(app

+, b

ase=

100)

Current Account and Real Exchange Rate

← Current Account (CA) deficit Current Account (CA) surplus →





90

95

100

105

110

115

-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0%

Rea

l exc

hang

e ra

te in

dex

(app

+, b

ase=

100)

Current Account and Real Exchange Rate

← Current Account (CA) deficit Current Account (CA) surplus →


( ) *%CA RERY

η∆ = − ∆






( ) *%CA RERY

η∆ = − ∆

.17η =RER appreciates by 1%

CA/GDP falls by 0.17%

Module:Section:



Course:9

4

4

The External Financial Account

Standard

MDSx





General principle:Flow balance (receipts – outlay) and financing must correspond one-to-one.

CA FA=






0CA >

0CA < Deficit: receive financing from rest of world.

Incurring obligations (liabilities).

Surplus: provide financing to rest of world.

Acquiring claims (assets).

0FA <

0FA >





Elements of Financial Account (Asset plus – BPM6):Foreign Direct Investment (FDI)

PortfolioMarketable DebtEquity Shares

Other LoansDerivatives

Reserves and Related Items (Accumulation Plus)





FDI and Equity:Investors knowingly bear risk; no fixed repayment contract

FDI more stable; specifically tied to productive elements

Debt – there is a contract to repay

Bonds – marketable

Loans – negotiated with creditors






-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Q1.2005 Q1.2006 Q1.2007 Q1.2008 Q1.2009 Q1.2010 Q1.2011 Q1.2012 Q1.2013 Q1.2014 Q1.2015 Q1.2016

Indonesia: Current Account and Incurrence of Debt (in percent of GDP)

Current Account/GDP

Debt Liab/GDP

Source: Bank of Indonesia/Haver






-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Q1.2005 Q1.2006 Q1.2007 Q1.2008 Q1.2009 Q1.2010 Q1.2011 Q1.2012 Q1.2013 Q1.2014 Q1.2015 Q1.2016

Indonesia: Current Account and Overall Balance (in percent of GDP)

Current Account/GDP

Overall Balance/GDP

Source: Bank of Indonesia/Haver

Module:Section:



Course:9

4

5

Shifting Financial Conditions

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MDSx





Non-Reserve Financial Account:A function of home and foreign interest rates (all else held equal).

*( - ) ( , ;other factors)FA non res f r r=FA (Non-reserve)






FROM THE MONETARY MODULEDomestic monetary policy Tighter Looser

External financing More Less

CONSISTENT WITH MONETARY MODULE

External financial conditions Tighter Looser

External financing Less More

Module:Section:



Course:9

4

6

Financial Account Balance

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MDSx




Financial Account Balance

Signals of inappropriately high external financial flows:

Shift away from stable and productive financing

Prolonged drawdown of reserves

Temporary abundance of debt financing

Long run: markets willing to provide less financing

High or rising country risk premiums

Module:Section:



Course:9

4

7

Financial Account Balance in Excel

Excel

MDSx

Module:Section:



Course:9

5

1

Summarizing What We Have Learned

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MDSx




Summarizing What We Have Learned

The external position

Links between external sector and other underlying macroeconomic concerns

Exposure to global events

External position and real exchange rate warning signs

Module:Section:



Course:9

6

1

Assessing Diagnostica

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MDSx

macroeconomic diagnostics ( mdsx) module 9 · nx ca. not comprehensive ... source: bank of...

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