MACROECONOMIC STATISTICS

MACROECONOMIC STATISTICS

MACROECONOMIC STATISTICS

Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,

Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest

Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest

MACROECONOMIC STATISTICS

Author: Gábor Oblath

Supervised by Gábor Oblath January 2011

ELTE Faculty of Social Sciences, Department of Economics

MACROECONOMIC STATISTICS

Week 6

External and internal balance/imbalance:

international comparisons and decompositions

Part II

Gábor Oblath

The meaning of external imbalance – international comparisons

• Difference in flows relative to GDP (CA, CA+KA, CA+KA+NEO)?

• Changes in stocks relative to GDP?

(dNFA/GDP) (flow-s + others)

• Change in ratios to GDP? (nfa_t–nfa_t–1)

• A part of the latter?

– Only debt?

• Gross?

• Net?

Example: US flows and revaluations (KG) and changes in net international investment position

(in % of GDP)

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 f in f lows/GDP Kg_market/GDP dNIIPmarket/GDP

Flows

KG

Introduction: discussion over US BOP – does the US have a CA deficit?

• The idea

CA dNFA = h*NFA + etc.

• Question: can NFA<0, if h*NFA>0

• But if NFA>0, then ΣdNFA ( ΣCA) is also positive – the US has no CA deficit  ”dark matter” proposition*/ and debate

(NFI)

*/R. Hausmann–F. Sturzenegger – several articles

The notion of ”dark-matter” (DM) in the BOP of nations: claims

• H–S*/ claim: BOP statistics are false: US has no CA deficit

• Why? Because US NII continuously positive  NFA and ΔNFA ( CA) also ”has to be” positive

• ”Implied” CA balance reconstructed in two steps

– Capitalising NII by an arbitrary 5% (P/E: 20)

– Annual change in capitalised NII ^ ”implied” CA

• Difference between actual and implied CA:

exports of ”dark matter” (intangible capital)

*/R. Hausmann–F. Sturzenegger: Global imbalances or bad accounting? The missing dark

matter in the wealth of nations (May, 2006): http://200.32.4.58/~fsturzen/dark_matter_may06.pdf

US net international investment income (NII = net profits and interest)

(million USD)

0 10 000 20 000 30 000 40 000 50 000 60 000 70 000

1990 1991

1992 1993

1994 1995

1996 1997

1998 1999

2000 2001

2002 2003

2004 2005

2006

US: CA and two components: net exports (NX) and net investment income (NII)

(% of GDP)

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 NII/GDP

CA/GDP NX/GDP

US: net investment income (NII), the CA, and NFA (at current cost and market value) in % of GDP

-24%

-22%

-20%

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 NII/GDP

CA/GDP

NFA_market/GDP NFA_curcost/GDP

The world according Hausmann-Sturzenegger Implication: no global imbalances

Rate of return on market value of US foreign assets (FA) and liabilities (FL)

2%

3%

4%

5%

6%

7%

8%

9%

1989 1990

1991 1992

1993 1994

1995 1996

1997 1998

1999 2000

2001 2002

2003 2004

2005 2006 iFL_market

iFA_market

The notion of ”dark-matter”: some critical remarks in defence of statistics

• If BOP statistics inaccurate: why just NII right, if both CA and NFA wrong

• Several plausible/relevant explanations for differences in rates of return on FA and FL: no need to ”invent” new BOP statistics

• Dangerous precedent:

– if your story/theory does not fit the facts

– or statistics (apparently or actually) contradict one another – you can simply construct data corresponding to your preferred

interpretation

• Having said this,

– exports and imports of intangible capital (not covered by statistics) is quite possible under conditions of globalisation,

– identifying and measuring it – constitutes a major challenge for both economists and statisticians.

International comparisons

• The standard indicator of external imbalance: CA/GDP

• However: CA/GDP ratios are unfit for international comparison

• Types of problems

– Technical – Substantive

Comparable BOP statistics

• IMF: IFS and BOPS

http://www.imf.org/external/data.htm

• Eurostat

http://epp.eurostat.ec.europa.eu/portal/page/

portal/balance_of_payments/data/database

• HU: MNB

CA/GDP ratios: problems in comparison

• Technical:

– problems with the numerator – problems with the denominator

• Substantive what lies behind external deficits

– Levels

• Gov, or private

• Financing: debt or non-debt (FDI/equity)

– Trends in investments/savings – Sustainability (growth vs. deficits)

Problems with the numerator

• CA vs. CA+KA (NL/NB) – transfers from EU-funds

• Reinvested earnings

• Nominal vs. real (operational) balance

• Revaluations

• Statistical discrepancy (NEO)

Problem 1

CA vs. NL (=CA+KA) (2000–2005 average)

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

CZ EST HU PL SK GR ESP PT IRL USA

CA/GDP

(CA+KA)/GDP

CA vs. CA+KA (in % of GDP): CZ, HU, PL

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

2005 2006

CA+KA

CA -7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

2005 2006

CA+KA CA

-4,0%

-3,5%

-3,0%

-2,5%

-2,0%

-1,5%

-1,0%

-0,5%

0,0%

2005 2006

CA+KA CA

CZ HU

PL

The role of capital transfers is increasing; most visibly for Poland

Problem 2: reinvested earnings in % of GDP (average 2000–2005)

-12%

-10%

-8%

-6%

-4%

-2%

0%

CZ EST HU PL ESP PT USA

CA/GDP

(CA+KA)/GDP (CA+KA+IRE)/GDP (CA+KA+NRE)/GDP

Problem 3

• Operational vs. nominal

• Importance of real changes in NFA ( CA)

• However: iNFA rNFA+ NFA

Nominal and operational (real) net lending (”from below”: NL= CA+KA+NEO)

in % of GDP

Source: Financial Accounts, Hungary (MNB)

The difference between NL és NL(op): inflation-compensation

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

2000 2001 2002 2003 2004 2005

NL NL(op) infl. komp.

Problem 4

• Capital gains/losses

• Important in case of large stocks (FA, FL) relative to GDP

• Sustained real appreciation/depreciation of currency decreases/increases

debt/GDP ratio

dNFA/GDP:

revaluations and flows (Hungary’s example)

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

2001 2002 2003 2004 2005 2001- 2005

2001- 2002

2003- 2005 Átért+egyéb

CA+KA+NEO

-60 -50 -40 -30 -20 -10 0 10

2001 2002 2003 2004 2005 2001- 2005

2001- 2002

2003- 2005 Átért+egyéb

CA+KA+NEO dNFA

Contributions to dNFA(t)/GDP(t) (%-points)

The structure of dNFA(t) (%) Capital gain

Problem 5

• NEO: statistical error/discrepancy

• Generally assumed: unrecorded capital flows

• But may include unrecorded CA items

• E.g. HU: could have been unrecorded imports (after EU-accession in 2004)

NEO: international comparison

-4,0%

-3,0%

-2,0%

-1,0%

0,0%

1,0%

2,0%

3,0%

Netherlands Hungary Austria Slovenia Poland Spain Latvia Lithuania Estonia UnitedKingdom CzechRepublic

2003 2004 2005

2005I-III 2006I-III

NEO/total current revenues (%)

Problems with the denominator (GDP)

• CA/GDP does not control for the ”real” size of economies

– CA measured at international, – GDP at national prices

• The price level of GDP is lower, the lower the level of development (B–S effect: NT/T sectors)

• The CA/GDP ratio overestimates the relative size of deficits of less developed countries

– CEE–NMS: special problem: extremely low relative price level of public services (no relevance for the size of deficits)

• The proper indicator: CA /Tradables (directly unavailable)

• Proxies:

– CA/GDP at PPP

– CA/external revenues

• CA/Xgs

• CA/current revenues

Relative real GDP and price levels

40 50 60 70 80 90 100

40 50 60 70 80 90 100

GDP relative price

LV LT

EE PL

SK

HU

CZ

MT PT

SL GR

CY

ES

Per capita GDP (PPS)

Relative GDP price levels and the relative price of goods, services and government services

20 30 40 50 60 70 80 90 100

40 50 60 70 80 90

Goods Services Gov. services SK

LT LV CZ PL

HU EE

MT SL PT

GR ES CY

GDP relative price level

CA+KA (=NL) in % of

a) GDP; b) exports of goods and services;

c) total current revenues

-30%

-25%

-20%

-15%

-10%

-5%

0%

CZ EST HU PL SK GR ESP PT

(CA+KA)/GDP (CA+KA)/Xgs (CA+KA)/CFR

CA+KA (=NL) in % of GDP

[GDP a) at current prices; b) at PPP-s]

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

CZ EST HU PL SK GR ESP PT IRL USA

(CA+KA)/GDP

(CA+KA)/GDP_PPP

Some further problems with simple comparisons of CA/GDP ratios

• Domestic counterpart of the CA balance:

– S – I (S falls or I increases)

– Government vs. private sector (”Lawson doctrine”)

• Financing: debt vs. equity (FDI)

• Sustainability (later)

• Bottom line:

• Avoid rapid judgements based on comparison of CA/GDP ratios

• A complex set of indicators necessary for valid comparisons

International comparisons (a)

Tendencies in total S, I and S-I in % of GDP

Source: AMECO

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

1999 2000 2001 2002 2003 2004 2005 2006

EU-25

Czech Republic Estonia Greece Spain Latvia Lithuania Hungary Poland Portugal Slovenia Slovakia

10%

15%

20%

25%

30%

35%

40%

1999 2000 2001 2002 2003 2004 2005 2006

EU-25

Czech Republic Estonia Greece Spain Latvia Lithuania Hungary Poland Portugal Slovenia Slovakia

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

1999 2000 2001 2002 2003 2004 2005 2006

EU-25 Czech Republic Estonia Greece Spain Latvia Lithuania Hungary Poland Portugal Slovenia Slovakia

S

I

S-I

International comparisons (b)

Government savings [S(gov)/GDP]

-6%

-4%

-2%

0%

2%

4%

6%

8%

1999 2000 2001 2002 2003 2004 2005 2006

EU-25

Czech Republic Estonia

Greece Spain Latvia Lithuania Hungary Poland Portugal Slovenia Slovakia

Source: AMECO

Sustainability: a possible interpretation*/

*/Lane–Milesi–Ferretti (2006)

Decompositions of the change in NFA/GDP

• What is the use?

– Helps understand the dynamics behind the accumulation of net foreign liabilities/assets

• Illustrations based on Hungarian data, 2001–2005 (Source: BOP+Net international investment position, NIIP)

Components of the change in NFA/GDP (nfa) (I)

) 1 (

) 1

( ^{1 1}

1 t t t

t L t t

t A t t

t t

t t

t fl neo egyéb

g g fa r

g g ka r

nfctr nli

nxgs nfa

nfa

r(A)debt

r(A)eq r(L)debt

r(L)eq r(nfa)eq r(nfa)debt

”Dynamic factors”

*/Other items

*/

Implicit nominal property income [interest + profits (i)] and capital gains; and total nominal and real return on FA és FL

-5%

0%

5%

10%

15%

20%

2001 2002 2003 2004 2005

iFA iFL kgFA kgFL

0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005

i+kg_FA i+kg_FL

Nominal

Real

-10%

-5%

0%

5%

10%

15%

20%

2001 2002 2003 2004 2005

rrA rrL

Components of total nominal and real returns

-5%

0%

5%

10%

15%

20%

25%

30%

2001 2002 2003 2004 2005

kgNFA iNFA (i+kg)NFA

-10%

-5%

0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005

rkgNFA rNFA rrNFA

kg nfa

i 1

1 1

Nominal Real

The combined effect of real growth and real returns vs. other factors on the change in nfa

-15%

-10%

-5%

0%

5%

10%

2001 2002 2003 2004 2005

FA*(rr-g) -FL*(rr-g) Együtt din nfa_t - nfa_t-1

-15%

-10%

-5%

0%

5%

10%

2001 2002 2003 2004 2005

Ndebt*(rr-g) Neq*(rr-g) Együtt din nfa_t - nfa_t-1

The change in nfa:

”dynamic” factors vs. others ( primary balance)

-20%

-15%

-10%

-5%

0%

5%

2001 2002 2003 2004 2005

"dinamikus" "elsődleges" nfa_t - nfa_t-1

Dynamic

Primary

The nfa-stabilising

”primary balance” and the ”primary gap”

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2001 2002 2003 2004 2005

"dinamikus" "elsődleges" stabilizáló elsődleges elsődleges rés nfa_t - nfa_t-1

Dynamic

Primary

Components of changes in nfa (II)

) 1 (

) 1

( ^{1 1}

1 t t t

t L A t

t L t t

t t

t t

t fa neo egyéb

g r nfa r

g g ka r

nfctr nli

nxgs nfa

nfa

Return on liabilities minus growth

Return on assets minus liabilities

NEO+others:

”dark matter”?

X-M

Labour income

Current transfers

Capital transfers

”Real” ”Transfers”

Implicit (HUF) nominal property income, capital gains and returns

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2001 2002 2003 2004 2005

iFA_debt i_FA_eq iFL_debt iFL_eq

-15%

-10%

-5%

0%

5%

10%

15%

20%

2001 2002 2003 2004 2005

kgFA_debt kgFA_eq kgFL_debt kgFL_eq

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2001 2002 2003 2004 2005

nrFA_debt nrFA_eq nrFL_debt nrFL_eq

Implicit real returns and nominal and real effective exchange rate of the HUF (%-change; increase: depreciation)

-15%

-10%

-5%

0%

5%

10%

15%

20%

2001 2002 2003 2004 2005

rrFA_debt rrFA_eq rrFL_debt rrFL_eq neer

Quantifying decomposition (cont.)

-15%

-10%

-5%

0%

5%

10%

2001 2002 2003 2004 2005

neo+egyéb nx_gs+ntr(c+k) fa*(rA-rL)/(1+g) nfa*(rL-g)/(1+g) nfa_t - nfa_t-1

Cumulative changes

8,3%

0,2% -2,0%

-9,8%

-2,7%

-4,6%

-4,2%

-2,6%

-3,7%

-5,6%

-5,3%

0,5%

-1,5%

-3,5%

-0,8%

1,1%

-21,3%

-13,3%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

kum2001-2002 2001-2003 2001-2004 2001-2005

neo+egyéb nx_gs+ntr(c+k) fa*(rA-rL)/(1+g) nfa*(rL-g)/(1+g) nfa_t - nfa_t-1

International comparison (based on Lane and Milesi-Feretti, 2005)

HU (96–2004 –29,3 –10,5 –52 +1,2 23,4 8,8 23,5