Global Imbalances and Settlement Currency: Trade, Finance & Macroeconomy Apostolos Apostolou 37th Annual Monetary and Trade Conference: Global Trade: Darkening Clouds or New Beginnings?
The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.
Stylized Fact I: Persistent current accounts USA EA EMDE excl China
Current account (percent of world GDP) 2.5
China AE excl. US and EA
2 1.5 1 0.5 0 -0.5 -1 -1.5 -2 1999
2001
Sources: IMF WEO
2003
2005
2007
2009
2011
2013
2015
2017
Stylized Fact II: World trade ↑ & UST10Y yield ↓ World trade and yields (percent) 140
World Exports as % US NGDP (LHS) UST 10Y (yield) 16 14
120
12
100
10
80
8 60
6
40
4
20
2
0
0
1981
1988
Sources: FED FRED and WTO
1995
2002
2009
2016
Stylized Fact IIIa: USD in FX markets FX turnover (percent) 95 US dollar 90
85
80
75
1995
1998
2001
2004
Sources: BIS Triennial Central Bank Survey
2007
2010
2013
2016
Stylized Fact IIIb: USD Dominant in Payments Settlement International payments currency based on value (percent) 60 50 40 30 20 10 0 2014 Sources: SWIFT
2015
2016
2017
2018
2019
Stylized Fact IV: Labor share as % GDP ↓ Share of Labor Compensation in US GDP (percent)
64
62
60
58
Sources: FED FRED
Global Imbalances: Some literature I
Gourinchas and Rey (2007) adjustment could take place through differences in the returns foreigners receive from holding U.S. assets compared to the returns U.S. residents receive on foreign assets.
I
Gourinchas et al. (2010), regard the U.S. as a global insurer able to provide insurance against adverse shocks
I
Caballero et al. (2008a), build a model of global imbalances, emphasizing one internationally traded safe asset
I
Mendoza et al. (2009), build a model with different levels of financial development, leading to large and persistent global imbalances, as countries with deeper financial markets decrease savings and borrow from abroad
I
Gopinath and Stein (2018), find that U.S. dollar invoicing reduces borrowing rates
A two-country model with a dominant settlement currency
I
Model builds on Corsetti and Pesenti (2005), (2009)
I
Home (H) and Foreign (F) countries
I
Each country consumes 2 goods: Home and Foreign
I
Monopolistic competition setting
I
Foreign country pays for some imports in the Home currency (dominant settlement currency)
I
Money supply defines consumption
I
Firms use labor as input.
model
Result I: Home Trade Deficit ↑ 1.10
Consumption/GDP
1.08
1.06
1.04
1.02
gM (percent) 1.00
1
2
3 σ=0.25
4
5 σ=0.5
6
7 σ=0.8
8
9
10
σ=0.9
Figure : The Home trade balance deteriorates the more the Foreign consumer uses Home currency to pay for imports
Result II: Home Utility ↑ 1.08
U
1.06
1.04
1.02
gM (percent) 1.00 1
2
3
σ=0.25
4
5
σ=0.5
6
7
σ=0.8
8
9
10
σ=0.9
Figure : Home utility (U) increases the more the Foreign consumer uses Home currency to pay for imports
Result III: Home Labor Effort ↓ 1.00
l
0.99
0.98
0.97
0.96
gM (percent) 0.95 1
2
3 σ=0.25
4
5 σ=0.5
6
7 σ=0.8
8
9
10
σ=0.9
Figure : Home Labor effort (l) decreases the more the Foreign consumer uses Home currency to pay for imports
Results IV: Home Interest Rate ↓
4
interest rate (percent)
Value suggested by SWIFT data (~50 percent)
3.5 β=0.1
3
β=0.2
2.5
β=0.3 β=0.4
2
β=0.5
1.5 1 0.5 0
σ=0.001
σ=0.025
σ=0.1
σ=0.3
σ=0.5
σ=0.7
σ=0.9
Figure : US interest rates reduction as the proportion of RoW imports settled in U.S. dollars increases (1980-2016) model
Correlation in the data 10
UST 10 (percent)
9 8 7 6 5 4 3
R² = 0.8196
2 1 RoW FCE
0 0
10,000
20,000
30,000
40,000
50,000
Figure : Negative correlation between US interest rates and the RoW final consumption expenditure
Some Empirical evidence (UST 10)t = c + β1
US FCEt US Bondst
+ β2
RoW FCEt US Bondst
+ β3
Table : OLS regression results c (US FCE)/(US Bonds) (RoW FCE)/(US Bonds) (US Int Inc)/(US Bonds) R2
(1) 8.6674 (1.4382) 1.5190 (0.4192) -0.4619 (0.2171) -275.4584 (31.6607) 0.8008
US Int Inct US Bondst
Main Findings & Final Comments
Settlement currency has macrofinancial effects such as: I
Lower US rates
I
Contributes to global imbalances
I
Consumption and labor shifts
Reversal of global trade trends is likely to have macrofinancial effects
Background Slides: Theoretical Model
Households and Consumption I
A NOEM framework with a continuum of households, all identical. The Home consumer utility: Ut = ζ t [ln Ct − κlt ] , κ > 0
→ ζ < 1 is the discount factor, Ct is consumption, κ is the disutility of labor and lt is the labor effort I
The consumption index is: Ct = [Ct (H)]α [Ct (F )]1−α
I
Each brand an imperfect substitute with CES θ. Z 0 back
1
θ
[Ct (H, j)] θ−1 dj
Ct (H) =
θ θ−1
1
Z
θ
[Ct (F , j)] θ−1 dj
; Ct (F ) = 0
θ θ−1
Monetary Policy, Firms, Technologies and Sales I
The monetary policy defines nominal consumption as: µt = Pt Ct
I
The monetary policy stance of Home and Foreign country is: µt = Pt Ct + σβεt Pt∗ Ct∗ ;
µ∗t = (1 − β) Pt∗ Ct∗ + (1 − σ)βPt∗ Ct∗
→ σ is the share of Foreign imports settled in the Home currency I
The demands are: Yt (j) = α
Yt∗ (j) = (1 − α) I
Pt (H, j) Pt (H)
Pt (F , j) Pt (F )
−θ
−θ
∗ Pt Ct Pt (H, j) −θ Pt∗ Ct∗ +β Pt (H) Pt∗ (H) Pt∗ (H)
∗ Pt (F , j) −θ Pt∗ Ct∗ ∗ Pt Ct + (1 − β) P (H) Pt (F ) Pt∗ (F ) Pt∗ (F ) t
Technologies are given by: Yt (j) = Zt lt (j);
Zt denotes labor productivity. back
Yt∗ (j) = Zt∗ lt∗ (j)
Budget Constraint and Exchange Rate I
Budget constraint is: 1 d,F 1 d,F ∗d,F M + Mt∗d,F + Pt∗ Ct∗ = St∗ (F ) + Mt−1 + Mt−1 + Tt∗ εt t εt
I
Nominal exchange rate is: εt =
1 − σβ µt 1 − α µ∗t β 1 + σ (1 − α) +
gtM 1+gtM
→ gtM is the growth in the Foreign demand for Home currency I
Nominal consumption ratio between Home & Foreign is: Q̃t =
back
εt Pt∗ Ct∗ 1−α 1 = Pt Ct β 1+σ
gtM 1+gtM
Dynamic: Bond Holdings and Interest Rate I
The bond market clears when: BtH + Bt∗H = BtF + Bt∗F = 0
I
The budget constraint is: (1−α)Pt Ct = εt Pt∗ Ct∗ 1 +
gtM H ∗H σ β−Bt+1 −εt Bt+1 +(1+it )BtH +εt (1+it∗ )Bt∗H 1 + gtM
→ i and i ∗ are the interest rates on Home and Foreign bonds I
The reduction in the interest rate paid by the Home country: ĩt =
→ Balanced growth path. back
gM εt Pt∗ Ct∗ 1+g σβ M
BtH