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Liberty Street Economics
10 posts on "Balance of Payments"April 17, 2020
Treasury Market Liquidity during the COVID-19 Crisis
A key objective of recent Federal Reserve policy actions is to address the deterioration in financial market functioning. The U.S. Treasury securities market, in particular, has been the subject of Fed and market participants’ concerns, and the venue for some of the Fed’s initiatives. In this post, we evaluate a basic metric of market functioning for Treasury securities— market liquidity—through the first month of the Fed’s extraordinary actions. Our particular focus is on how liquidity in March 2020 compares to that observed over the past fifteen years, a period that includes the 2007-09 financial crisis.
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Posted by Blog Author at 12:01 PM in Balance of Payments, Banks, Central Bank, Corporate Finance, Financial Markets, Pandemic | Permalink | Comments (1)March 27, 2020
Fight the Pandemic, Save the Economy: Lessons from the 1918 Flu
The COVID-19 outbreak has sparked urgent questions about the impact of pandemics, and associated countermeasures, on the real economy. Policymakers are in uncharted territory, with little guidance on what the expected economic fallout will be and how the crisis should be managed. In this blog post, we use insights from a recent research paper to discuss two sets of questions. First, what are the real economic effects of a pandemic—and are these effects temporary or persistent? Second, how does the local public health response affect the economic severity of the pandemic? In particular, do non-pharmaceutical interventions (NPIs) such as social distancing have economic costs, or do policies that slow the spread of the pandemic also reduce its economic severity?
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Posted by Blog Author at 5:18 PM in Balance of Payments, Crisis, Economic History, Pandemic, Recession | Permalink | Comments (3)August 07, 2019
Does a Data Quirk Inflate China’s Travel Services Deficit?
Chinese residents are increasingly traveling to see the rest of the world, logging a total of 162 million foreign visits in 2018, up from 57 million in 2010. Increased travel spending by Chinese residents is acting to reduce the country's trade surplus because such spending is counted as a services import. However, there appears to be a quirk in the Chinese data that results in a significant understatement of the offsetting spending by visitors to China (a services export). According to other Chinese data, this understatement totaled $85 billion in 2018. If so, China's deficit in travel services is smaller than officially reported, and its trade surplus correspondingly larger.
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Posted by Blog Author at 7:00 AM in Balance of Payments, Current Account, Exports, International Economics | Permalink | Comments (0)November 28, 2018
Is the United States Relying on Foreign Investors to Fund Its Larger Budget Deficit?
The federal tax cut and the increase in federal spending at the beginning of 2018 substantially increased the government deficit, requiring a jump in the amount of Treasury securities needed to fund the gap. One question is whether the government will have to rely on foreign investors to buy these securities. Data for the first half of 2018 are available and, so far, the country has not had to increase the pace of borrowing from abroad. The current account balance, which measures how much the United States borrows from the rest of the world, has been essentially unchanged. Instead, the tax cut has boosted private saving, allowing the United States to finance the higher federal government deficit without increasing the amount borrowed from foreign investors.
May 09, 2016
The Turnaround in Private and Public Financial Outflows from China
China lends to the rest of the world because it saves much more than it needs to fund its high level of physical investment spending. For years, the public sector accounted for this lending through the Chinese central bank’s purchase of foreign assets, but this changed in 2015. The country still had substantial net financial outflows, but unlike in previous years, more private money was pouring out of China than was flowing in. This shift in private sector behavior forced the central bank to sell foreign assets so that the sum of net private and public outflows would equal the saving surplus at prevailing exchange rates. Explanations for this turnaround by private investors include lower returns on domestic investment spending and a less optimistic outlook for China’s currency.
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Posted by Blog Author at 7:00 AM in Balance of Payments, Central Bank, Current Account, Exchange Rates, Exports, Financial Markets, International Economics | Permalink | Comments (0)August 12, 2015
Do Asset Purchase Programs Push Capital Abroad?
Thomas Klitgaard and David O. Lucca
Euro area sovereign bond yields fell to record lows and the euro weakened after the European Central Bank (ECB) dramatically expanded its asset purchase program in early 2015. Some analysts predicted massive financial outflows spilling out of the euro area and affecting global markets as investors sought higher yields abroad. These arguments ignore balance of payments accounting, which requires any financial outflow from the euro area to be matched by a similar-sized inflow, absent a quick and substantial current account improvement. The focus on cross-border financial flows also is misguided since, according to asset pricing principles, the euro and global asset prices can move without any change in financial outflows.
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Posted by Blog Author at 7:00 AM in Balance of Payments, Euro Area, Exchange Rates, Exports, Financial Markets, International Economics, Monetary Policy | Permalink | Comments (2)November 04, 2013
Japan's Missing Wall of Money
Thomas Klitgaard
The Bank of Japan announced an open-ended asset purchase program in January 2013 and an unexpectedly ramped-up version of the program was implemented in early April. Market commentary at that time suggested that flooding the economy with liquidity would lead to a “wall of money” flowing out of Japan in search of higher yields, affecting asset prices worldwide. So far, however, Japan’s wall of money remains missing in action, with no pickup in Japanese foreign investment since the April policy shift. Why is this? Here we explain that while economic theory does not offer clear guidance on how financial outflows might respond to the injection of cash from central bank asset purchases, it does point to an important constraint on the potential size. In particular, monetary expansion will not cause a surge in financial outflows unless it also induces a similar surge in capital flowing into the country.
Posted by Blog Author at 7:00 AM in Balance of Payments, Current Account, Exchange Rates, Exports, International Economics | Permalink | Comments (1)October 02, 2013
Capital Flight inside the Euro Area: Cooling Off a Fire Sale
Matthew Higgins and Thomas Klitgaard
Countries in the euro area periphery such as Greece, Italy, Portugal, and Spain saw large-scale capital flight in 2011 and the first half of 2012. While events unfolded much like a balance of payments crisis, the contraction in domestic credit was less severe than would ordinarily be caused by capital flight of this scale. Why was that? An important reason is that much of the capital flight was financed by credits to deficit countries’ central banks, with those credits extended collectively by other central banks in the euro area. This balance of payments financing was paired with policies to supply liquidity to periphery commercial banks. Absent these twin lifelines, periphery countries would have had to endure even steeper recessions from the sudden withdrawal of foreign capital.
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Posted by Blog Author at 7:00 AM in Balance of Payments, Credit, Crisis, Euro Area, Exchange Rates, Exports, Fire Sale, International Economics | Permalink | Comments (0)May 22, 2013
Foreign Borrowing in the Euro Area Periphery: The End Is Near
Matthew Higgins and Thomas Klitgaard
Current account deficits in euro area periphery countries have now largely disappeared. This represents a substantial adjustment. Only two years ago, deficits stood at nearly 10 percent of GDP in Greece and Portugal and 5 percent in Spain and Italy (see chart below). This sharp narrowing means that spending has been brought in line with income, largely righting an imbalance that had left these countries dependent on heavy foreign borrowing. However, adjustment has come at a sizable cost to growth, with lower domestic spending only partly offset by higher export sales. Downward pressure on domestic spending should abate now that the periphery countries have been weaned from foreign borrowing. The risk, though, is that foreign creditors might demand that the countries pay down (rather than merely service) accumulated external debts, forcing them to reduce spending below incomes.
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Posted by Blog Author at 7:00 AM in Balance of Payments, Current Account, Euro Area, Exchange Rates, Exports, International Economics | Permalink | Comments (1)November 14, 2012
Income Flows from U.S. Foreign Assets and Liabilities
Matthew Higgins and Thomas Klitgaard
Foreign investors placed roughly $1.0 trillion in U.S. assets in 2011, pushing the total value of their claims on the United States to $20.6 trillion. Over the same period, U.S. investors placed $0.5 trillion abroad, bringing total U.S. holdings of foreign assets to $16.4 trillion. One might expect that the large gap of-$4.2 trillion between U.S. assets and liabilities would come with a substantial servicing burden. Yet U.S. income receipts easily exceed payments abroad. As we explain in this post, a key reason is that foreign investments in the United States are weighted toward interest-bearing assets currently paying a low rate of return while U.S. investments abroad are weighted toward multinationals' foreign operations and other corporate claims earning a much higher rate of return.
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Posted by Blog Author at 7:00 AM in Balance of Payments, Exchange Rates, International Economics | Permalink | Comments (0)About the BlogLiberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.
Liberty Street Economics does not publish new posts during the blackout periods surrounding Federal Open Market Committee meetings.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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