Sustainability of External Imbalances: A Critical Appraisal

336 Pages·2015·1.93 MB·English

by  Angélique Herzberg (auth.)

Sustainability of External Imbalances
Angélique Herzberg
Sustainability of External
Imbalances
A Critical Appraisal
With a Preface by Prof. Dr. Heinz-Dieter Smeets
Angélique Herzberg
Düsseldorf, Germany
Dissertation Heinrich-Heine-Universität Düsseldorf, 2013
ISBN 978-3-658-07090-8 ISBN 978-3-658-07091-5 (eBook)
DOI 10.1007/978-3-658-07091-5
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Preface
Theterm“globalimbalances”denoteslargeandpersistingcurrentaccountsurplusesanddeficits
betweencountriesandcountrygroups.Thequestionofwhethereconomiesmayhave—oreven
shouldhave—largesurplusesanddeficitsinthecurrentaccountranksamongthemostcontro-
versialissuesininternationaleconomics.ImbalancesbetweentheUnitedStates(asthelargest
deficitcountry)ontheonehandandChina,Germany,Japan,andtheOPECcountries(asthe
largestsurpluscountries)ontheotherhandcametoaheadsincethelate1990s.Manyobservers
holdthoseimbalancestobeoneofthemajorcausesoftheglobalfinancialandeconomiccrisis
of2008/2009.Althoughglobalimbalanceshadbeensomewhatreducedbothduringandafter
thisfinancialcrisis,mostforecastsexpectarenewedincreaseinthecourseofthecomingyears.
Theseconsiderationsleadtothequestionofhowthelimitsofimbalancesshouldbespecified
and,inparticular,whichimbalancesshouldberegardedasexcessiveorunsustainable.
Againstthisbackground,AngéliqueHerzberg’sdissertationdealswithsustainabilityofex-
ternal imbalances. The focus of this work lies, on the one hand, in a critical discussion of
differentmethodsavailableforassessingexternalsustainabilityand,ontheotherhand,inadis-
cussionoftheempiricalstudiesonsustainabilitywhichareusuallybasedontimeseriesorpanel
tests.However,thelargenumberofboththeoreticalconceptsandempiricalmethodsmakesit
difficulttoarriveatauniformconclusionregardingexternalsustainabilityofacountryorgroup
ofcountries.
AngèliqueHerzbergalsodiscussestheindicator-basedscoreboardoftheprocedureforpre-
ventingandcorrectingmacroeconomicimbalancesintheEuropeanUnion.However,thescore-
board’sindicatorsareintendedonlytoidentifythatanimbalanceexists;todeterminewhetherit
issustainableornot,requiresfurtheranalysis.Nevertheless,therelevantempiricalstudiesfind
some(althoughnotunanimous)evidencethatthoseindicatorscouldhavesentearlywarning
signalsofanupcomingsovereigndebtandfinancialcrisis.
Herthesisprovidesacomprehensiveandmostcompetentoverviewoftheliteratureonex-
ternalimbalances.Boththetheoreticalapproachesandmethodsaswellastheresultsofalarge
numberofempiricalstudiesonsustainabilityarepresentedandassessed.Acomparablesystem-
aticsurveyhasbeenlackingsofar,althoughthetheoreticalandempiricalliteratureonsustain-
abilityislargeandheterogeneous.Forallthosewhodealwiththeissueofglobalimbalances,
bothinacademiaandinpractice,thepresentworkgivesvaluableideasandconsiderations.
Düsseldorf,June2014 ProfessorDr.Heinz-DieterSmeets
Acknowledgments
Thisworkisadoctoralthesis,writtenwhileIwasaresearchassistantatHeinrichHeineUni-
versity,Düsseldorf,brieflyinterruptedbyvisitstotheUniversityofCalifornia,Berkeley,and
PrincetonUniversity.
Itisagreatpleasuretoacknowledgethesupportofmanypeoplewhohaveinonewayor
anothercontributedtothesuccessfulcompletionofthisdissertation.Firstandforemost,Iwould
liketoexpressmydeepestgratitudetomysupervisor,ProfessorDr.Heinz-DieterSmeets,for
hisveryvaluableandhelpfulguidanceatallstagesofthisthesis.Iamalsotrulyindebtedtohim
foralwayssupportingmeinmyeffortstobalanceworkandfamily.ThenIwouldliketothank
mysecondadvisor,ProfessorDr.AlbrechtF.Michler,notleastforagreeingtoreviewsucha
longthesis.
Ourdepartmentprovidesanamazingsocialenvironmentinacordialatmosphere.Ithasbeen
aninvaluablesourceofsupport,andIwouldliketothankallmypresentandformercolleagues,
manyofwhomhavebecomegoodfriendsovertheyears.Inparticular,IamgratefultoDipl.-
Kff. Laura Cüppers, Dr. Christian Fürtjes, Dr. Lucas Kramer, Dipl.-Oec. Anita Schmid, and
Marco Zimmermann, M.A., for all the lively discussions and helpful comments, for reading
throughpartsofmythesis,forrelievingmyworkburdenduringthelaststageofmythesis,as
wellasforjoyfulconversationsovercoffee.SpecialandheartfeltthanksgotoBirgitKnoke
undDipl.-Soz.DagmarNeumannforstronglysupportingandencouragingmeevensinceIwas
anundergraduate.IalsothankDr.MonikaBucherandDr.AchimHauckwhohavehelpedme
overcomeseveraldifficultiesinwritingtheintroduction.ManythanksgotoTimBöker,M.Sc.,
for thorough and detailed discussions of my econometric results. I am also very grateful to
MarkusPenatzer,M.Sc.,forbeingalwaysathelpwithtechnicalproblems(whetheritwasmy
computeroradishwasher).FurtherIamindebtedtoInnaKurennoyandRebeccaRothe,M.Sc.,
fortheiroutstandingresearchassistance(whichevenincludedworkingonweekendstobring
certaintrickytablesofmineintofinalform).Notleast,IamobligedtoDr.KathrinBerensmann
oftheGermanDevelopmentInstitutewhohelpedmegainabetterunderstandingofhowthe
IMF’sdebtsustainabilityanalysesanddebtsustainabilityframeworkrelate.Needlesstosay,I
takesoleresponsibilityforallremaininginadequaciesofthiswork.
Onapersonalnote,Iwouldliketothankmyfamilyandfriendsfortheircontinualsupport.
Itwasaprivilegetobesurroundedbycaringandlovingpeopleduringthe—sometimesquite
difficult—timeofthesiswriting.Atremendous“thankyou”goestomyhusbandwhoinvested
much time and patience in proofreading my thesis, was always ready to help fixing various
VIII Acknowledgments
mathematicalandLaTeXproblemsandwhoenduredanirritableandstressedmeforquitea
longtime.Ialsothankmywonderfulsonforhissweetsmilewhichalwayscheeredmeup.To
myparents,Iaminfinitelygratefulfortakingcareofmysonandbeingalwaysgenerouswith
theirtimeandresourcesinawayIcanneverrepay.Finally,thelastwordofacknowledgement
istoGod.HehasbeenmymajorsourceofstrengthandwithoutHimnoneofthiswouldhave
beenpossible.
Düsseldorf,July2014 AngéliqueHerzberg
Contents
1. Introduction ............................................................. 1
1.1. Motivationandaimofthestudy.......................................... 1
1.2. Preliminaries:definingthemainconcepts.................................. 6
1.2.1.Externalimbalances .............................................. 6
1.2.2.Sustainabilityconcepts ............................................ 7
1.3. Outlineofthestudy .................................................... 9
2. Digressiononbalanceofpaymentsaccountingidentities....................... 11
2.1. Accountingidentitybasedontradebalanceandincomebalances .............. 11
2.2. Accountingidentitybasedonincomeandabsorption ........................ 12
2.3. Accountingidentitybasedonsavingandinvestment......................... 12
2.4. Combiningaccountingidentities ......................................... 13
3. Intertemporalbudgetconstraintasasustainabilitycriterion................... 17
3.1. Long-runbudgetconstraintintheintertemporalapproachtothecurrentaccount . 19
3.1.1.Descriptionofthemodeleconomy .................................. 19
3.1.2.Single-periodbudgetconstraint..................................... 21
3.1.3.Intertemporalbudgetconstraintinthedeterministicsetting.............. 23
3.1.4.Specificintertemporalbudgetconstraintinthestochasticsetting ......... 30
3.2. Intertemporalbudgetconstraintinageneral-equilibriummodel................ 32
3.2.1.Characteristicsofthemodeleconomyandtherepresentativeagent’s
maximizationproblem ............................................ 32
3.2.2.Generalintertemporalbudgetconstraint.............................. 34
3.2.3.Comparisonofthegeneralintertemporalbudgetconstrainttothespecific
intertemporalbudgetconstraint ..................................... 36
3.3. Discussionofthetheoreticalframework ................................... 38
3.4. Conclusion ........................................................... 42
3.A.Appendixtosubsection3.1.3 ............................................ 45
3.A.1.Recursivesubstitutionmethod...................................... 45
3.A.2.TelescopingArgument ............................................ 46
3.B.Appendixtosubsection3.2.2 ............................................ 47
X Contents
4. Empiricalimplicationsoftheintertemporalbudgetconstraint ................. 49
4.1. Sufficientconditionsforthestrongnotionofsustainability ................... 50
4.1.1.StationarityoftheNIIPandthetradebalance ......................... 50
4.1.2.First-difference-stationarityoftheNIIP .............................. 53
4.1.3.Cointegrationbetweencurrentaccountcomponents.................... 55
4.1.4.Conclusion...................................................... 59
4.2. Sufficientconditionsforthestrongandweaknotionsofsustainability .......... 60
4.2.1.Difference-stationarityoftheNIIPofanyorder ....................... 61
4.2.2.ResponsivenessofthetradeaccounttotheNIIP ....................... 63
4.3. Conclusion ........................................................... 71
4.A.Appendixtosubsubsection4.2.2.1........................................ 75
4.B.Appendixtosubsubsection4.2.2.2........................................ 80
5. Empiricalstudiesonthevalidityoftheintertemporalbudgetconstraint......... 81
5.1. TestingforstationarityoftheNIIPandthecurrentaccount ................... 81
5.1.1.Overview ....................................................... 81
5.1.2.Linearunivariateunitroottests ..................................... 82
5.1.3.Linearpanel-basedunitroottests ................................... 90
5.1.4.Nonlinearunitroottests ........................................... 93
5.2. Testingforcointegrationbetweenthecomponentsofthecurrentaccount........ 98
5.2.1.Overview ....................................................... 98
5.2.2.Two-stepEngle-Grangermethodology...............................100
5.2.3.Error-correctionmodeltests........................................102
5.2.4.Autoregressivedistributedlagboundstest ............................103
5.2.5.Gregory-Hansentestwithstructuralbreaks ...........................104
5.2.6.Johansenmethodology ............................................105
5.2.7.Panelcointegrationtests...........................................107
5.3. TestingfortheresponsivenessofthetradeaccounttotheNIIP ................108
5.3.1.WickensandUctum’s(1993)approach...............................108
5.3.2.Multicointegrationapproach .......................................109
5.3.3.Bohn’s(2007)approach ...........................................111
5.4. Conclusion ...........................................................127
5.A.Appendixtosection5.1.................................................132
5.B.Appendixtosection5.2.................................................143
5.C.Appendixtosection5.3.................................................168
6. Dynamicbenchmarksofexternalsustainability ..............................173
6.1. Dynamicbenchmarkintheintertemporalapproachtothecurrentaccount.......174
6.1.1.Consumption-smoothingcurrentaccountpathundercertaintyequivalence.174
6.1.2.Consumption-smoothing current account path under certainty
equivalenceandlimitedcapitalmobility..............................187
6.1.3.Adjustingforconsumptiontiltingunderlinear-quadraticutility ..........188
6.1.4.Adjustingforconsumptiontiltingunderpowerutility ..................191
6.1.5.Introducinghabitformationunderlinear-quadraticutility ...............193
Contents XI
6.1.6.Incorporatingdurablegoodsunderlinear-quadraticutility...............197
6.1.7.Differentiatingbetweentradedandnon-tradedgoodsunderpowerutility ..201
6.1.8.Conclusion......................................................209
6.2. Dynamicbenchmarkintheportfolioapproachtothecurrentaccount ..........211
6.A.Appendixtosubsection6.1.7 ............................................217
6.B.Empiricalstudiestosection6.1 ..........................................220
7. Indicatorsofexternalsustainability.........................................235
7.1. Resourcegapasasustainabilityindicator..................................235
7.1.1.Non-increasingratioofnetforeigndebtsasasustainabilitycriterion......235
7.1.2.StabilizingtheNIIP-to-outputratioatthecurrentorrecentlyobserved
averagelevel.....................................................238
7.1.3.Stabilizingtheforeigndebt-to-exportsratioatthecurrentlevel...........254
7.1.4.StabilizingtheNIIP-to-outputratioattheleveldesiredbyinvestors.......257
7.1.5.Conclusion......................................................266
7.2. “Unsustainability”indicatorsinanonstructuralapproach ....................267
7.3. Indicatorsofcurrentaccountreversals ....................................270
7.4. IndicativethresholdsintheIMF’sdebtsustainabilityanalysis .................276
7.4.1.Debtsustainabilityanalysisformarket-accesscountries.................276
7.4.2.Debtsustainabilityanalysisforlow-incomecountries ..................277
7.4.3.HeavilyIndebtedPoorCountriesInitiative............................279
7.4.4.Conclusion......................................................280
7.5. ScoreboardoftheMacroeconomicImbalancesProcedureintheEU............281
7.6. Conclusion ...........................................................284
7.A.Appendixtosubsubsection7.1.2.6........................................285
7.B.Appendixtosection7.5 ................................................286
8. Concludingdiscussion ....................................................291
References...................................................................297