International Macroeconomics: Slides For Chapter 6: External Adjustment in Small and Large Economies
International Macroeconomics: Slides For Chapter 6: External Adjustment in Small and Large Economies
International Macroeconomics: Slides For Chapter 6: External Adjustment in Small and Large Economies
International Macroeconomics
Columbia University
May 1, 2016
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
I1 = I( r1; A2, . . . )
− +
r1
← I(r1 ; A2 )
I1
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
S1 = S( r1; Q1 Q2, . . . )
+ + −
r1
S1 (r1 ; Q1 , Q2 )
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
CA = S − I
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
r (a) (b)
1 r
1
S(r , Q )
1 1 CA(r )
a 1
a r
r
c
c r
r
b
b r
r
I(r )
1
S, I 0 CA
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
r1
CA1 (r1 ; . . .)
A
r ∗ r∗ , world interest rate
CA(r∗ ) 0 CA1
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
r1
CA(r1, Q1)
r*1
r*o
CA0 CA10 CA
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
CA(r1, Q11)
o
rc
1
rc
r* r*
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
r1
c
ro
c
* *
r r
1
S1 S1
o o
I1
1
I1 S, I CA1 CAo 0 CA
1 1
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
CA(r , Q1)
1 1
roc
1
rc
r* r*
So S1 Io S, I CAo CA1 0 CA
1 1 1 1 1
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
15
International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
or
(
r∗ + p if country is a debtor
r1 =
r∗ if country is a creditor
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
r1
CA(r1, Q1)
r*+p
*
r
CAo 0 CA
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
r
1
*
r +p(−CA)
r*
CA11 CA01 0 CA
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
large → r 6= r∗.
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
r
US′
RW CA US
CA CA
D′
B D
C A
CARW 0 CAUS
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
Ben S. Bernanke, “The Global Saving Glut and the U.S. Current
Account Deficit,” Homer Jones Lecture, St. Louis, Missouri, April
14, 2005.
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
Bernanke observes that between 1996 and 2004 the U.S. current
account has greatly deteriorated:
CA ($ bn) CA/GDP (in %)
1996 -125 -1.5
2000 -411 -4.0
2004 -634 -5.2
Note. These numbers differ slightly from those reported in Bernanke’s speech, because the
numbers in the table are revised numbers from the March 19, 2015 release.
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
1996 → ← 2004
−100
−200
Billions of Dollar
−300
−400
−500
−600
−700
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Year
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
1996 → ← 2004
−1
Percent of GDP
−2
−3
−4
−5
−6
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Year
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
The U.S. decided to save less and invest more ⇒ U.S. current
account schedule shifts up and to the left.
Over the past decade there was a significant increase in the global
supply of savings— a global saving glut ⇒ current account schedule
of the rest of the world shifts down and left
The “Made in the U.S.A.” Hypothesis versus Global Saving Glut Hypothesis
B CAU S (r)
r∗1
A
r∗o
A B
r∗o r∗1
o o
CARW CAU S
1
0 CAU S CAU S CARW CAU S
1
0 CAU S CAU S
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
How can we tell the Global Saving Glut Hypothesis and the
“Made in the U.S.A.” Hypothesis apart?
BUT
the global savings glut hypothesis predicts that interest rates fall
whereas the “Made in the U.S.A.” hypothesis predicts that interest
rates rise.
So we can use the observed behavior of interest rates to tell the two
hypotheses apart.
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
1996 → ← 2004
2
Percent per year
−1
−2
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Year
Note. The world real interest rate is approximated by the difference between the rate on 1-year U.S. Treasury securities and 1-year ex post CPI inflation.
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
3
Percent per year
−1
1995 2000 2005 2010
Year
Note. The world real interest rate is approximated by the difference between the rate on 10-year U.S. Treasury securities and 10-year expected inflation.
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
The figure shows that real interest rates fell, which is consistent
with the Global Savings Glut Hypothesis and inconsistent with the
“Made in the U.S.A.” hypothesis.
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International Macroeconomics, Chapter 6 Schmitt-Grohé, Uribe, Woodford
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