Transcription

International MacroeconomicsSchmitt-Grohé1Uribe2Woodford3This draft: April 15, 2021[Incomplete, Chapters 13-16 missing.]1Columbia University. E-mail: [email protected] University. E-mail: [email protected] University. E-mail: [email protected]

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Contents1 Global Imbalances11.1 The Balance of Payments . . . . . . . . . . . . . . . . . . . .41.2 The Trade Balance and the Current Account . . . . . . . . . 101.3 Trade Balances and Current-Account Balances Across Countries 151.4 Imbalances in Merchandise Trade . . . . . . . . . . . . . . . . 191.5 The Current Account and the Net International Investment Position 211.6 Valuation Changes and the Net International Investment Position 241.6.1A Hypothetical NIIP Without Valuation Changes . . 301.7 The Negative N IIP And Positive N II Paradox: Dark Matter? 321.7.1Dark Matter . . . . . . . . . . . . . . . . . . . . . . . 331.7.2Return Differentials . . . . . . . . . . . . . . . . . . . 351.7.3The Flip Side of the N IIP N II Paradox . . . . . . 371.8 Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 391.9 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422 Current Account Sustainability552.1 Can a Country Run a Perpetual Trade Balance Deficit? . . . 55iii

ivCONTENTS2.2Can a Country Run a Perpetual Current Account Deficit?.602.3Savings, Investment, and the Current Account . . . . . . . .622.3.1The Current Account As The Gap Between Savings and Investment 622.3.2The Current Account As the Gap Between National Income and Domestic Absor2.4Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . .2.5Appendix: Perpetual Trade-Balance and Current-Account Deficits in Infinite-Horizon E2.6Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 An Intertemporal Theory of the Current Account6573773.1The Intertemporal Budget Constraint . . . . . . . . . . . . .793.2The Lifetime Utility Function . . . . . . . . . . . . . . . . . .843.3The Optimal Intertemporal Allocation of Consumption . . . .893.4The Interest Rate Parity Condition . . . . . . . . . . . . . . .933.5Equilibrium in the Small Open Economy . . . . . . . . . . . .953.6The Trade Balance and the Current Account . . . . . . . . .983.7Adjustment to Temporary and Permanent Output Shocks . . 1003.7.1Adjustment to Temporary Output Shocks . . . . . . . 1013.7.2Adjustment to Permanent Output Shocks . . . . . . . 1053.8Anticipated Income Shocks . . . . . . . . . . . . . . . . . . . 1073.9An Economy with Logarithmic Preferences . . . . . . . . . . 1093.10 Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 1133.11 Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1154 Terms of Trade, the World Interest Rate, Tariffs and the Current Account1254.1Terms-of-Trade Shocks. . . . . . . . . . . . . . . . . . . . . 1274.2Terms-of-Trade Shocks and Imperfect Information . . . . . . 130

CONTENTSv4.3 Imperfect Information, The Price of Copper and the Chilean Current Account 1314.4 World Interest Rate Shocks . . . . . . . . . . . . . . . . . . . 1354.5 Import Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . 1384.5.1A Temporary Increase in Import Tariffs . . . . . . . . 1434.5.2A Permanent Increase in Import Tariffs . . . . . . . . 1454.5.3An Anticipated Future Increase in Import Tariffs . . . 1474.6 Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 1484.7 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1505 Current Account Determination in a Production Economy 1615.1 The Investment Decision of Firms . . . . . . . . . . . . . . . 1625.2 The Investment Schedule5.2.1. . . . . . . . . . . . . . . . . . . . 172The Profit Function . . . . . . . . . . . . . . . . . . . 1755.3 The Consumption-Saving Decision of Households . . . . . . . 1775.3.1Effect of a Temporary Increase in Productivity on Consumption1815.3.2Effect of an Anticipated Future Productivity Increase on Consumption1825.3.3Effect of an Increase in the Interest Rate on Consumption1845.4 The Saving Schedule . . . . . . . . . . . . . . . . . . . . . . . 1885.5 The Current Account Schedule . . . . . . . . . . . . . . . . . 1935.6 Equilibrium in the Production Economy . . . . . . . . . . . . 1955.6.1Adjustment of the Current Account to Changes in the World Interest Rate1955.6.2Adjustment of the Current Account to a Temporary Increase in Productivity1985.6.3Adjustment of the Current Account to an Anticipated Future Productivity Increase2015.7 Equilibrium in the Production Economy: An Algebraic Approach 2035.7.1Adjustment to an Increase in the World Interest Rate 208

viCONTENTS5.7.2Adjustment to a Temporary Increase in Productivity . 2095.7.3Adjustment to an Anticipated Future Increase in Productivity2115.8The Terms of Trade in the Production Economy . . . . . . . 2125.9An Application: Giant Oil Discoveries . . . . . . . . . . . . . 2145.10 Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 2185.11 Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2216 Uncertainty and the Current Account2296.1The Great Moderation. . . . . . . . . . . . . . . . . . . . . 2306.2Causes of the Great Moderation . . . . . . . . . . . . . . . . 2316.3The Great Moderation and the Emergence of Current Account Imbalances2346.4An Open Economy With Uncertainty . . . . . . . . . . . . . 2346.5Complete Asset Markets and the Current Account . . . . . . 2416.5.1State Contingent Claims . . . . . . . . . . . . . . . . . 2426.5.2The Household’s Problem . . . . . . . . . . . . . . . . 2446.5.3Free Capital Mobility . . . . . . . . . . . . . . . . . . 2466.5.4Equilibrium in the Complete Asset Market Economy . 2486.6Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 2516.7Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2527 Large Open Economies2617.1A Two-Country Economy . . . . . . . . . . . . . . . . . . . . 2627.2An Investment Surge in the United States . . . . . . . . . . . 2657.3Microfoundations of the Two-Country Model . . . . . . . . . 2687.4International Transmission of Country-Specific Shocks . . . . 2747.5Country Size and the International Transmission Mechanism 276

CONTENTSvii7.6 Explaining the U.S. Current Account Deficit: The Global Saving Glut Hypothesis2797.6.1Two Competing Hypotheses . . . . . . . . . . . . . . . 2807.6.2The Made in the U.S.A. Hypothesis Strikes Back . . . 2837.7 Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 2857.8 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2878 The Real Exchange Rate and Purchasing Power Parity2958.1 The Law of One Price . . . . . . . . . . . . . . . . . . . . . . 2968.2 Purchasing Power Parity . . . . . . . . . . . . . . . . . . . . . 3038.3 PPP Exchange Rates. . . . . . . . . . . . . . . . . . . . . . 3088.3.1Big Mac PPP Exchange Rates . . . . . . . . . . . . . 3098.3.2PPP Exchange Rates for Baskets of Goods . . . . . . 3108.3.3PPP Exchange Rates and Standard of Living Comparisons3118.3.4Rich Countries are More Expensive than Poor Countries3158.4 Relative Purchasing Power Parity . . . . . . . . . . . . . . . . 3178.4.1Does Relative PPP Hold in the Long Run? . . . . . . 3188.4.2Does Relative PPP Hold in the Short Run? . . . . . . 3248.5 How Wide Is the Border? . . . . . . . . . . . . . . . . . . . . 3258.6 Nontradable Goods and Deviations from Purchasing Power Parity3298.7 Trade Barriers and Real Exchange Rates . . . . . . . . . . . . 3338.8 Home Bias and the Real Exchange Rate . . . . . . . . . . . . 3358.9 Price Indices and Standards of Living . . . . . . . . . . . . . 3388.9.1Microfoundations of the Price Level . . . . . . . . . . 3398.9.2The Price Level, Income, and Welfare . . . . . . . . . 3428.10 Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 345

viiiCONTENTS8.11 Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3479 Determinants of the Real Exchange Rate9.1355The TNT Model . . . . . . . . . . . . . . . . . . . . . . . . . 3569.1.1Households . . . . . . . . . . . . . . . . . . . . . . . . 3579.1.2Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . 3619.1.3Adjustment of the Relative Price of Nontradables to Interest-Rate and Endowme9.2From the Relative Price of Nontradables to the Real Exchange Rate3709.3The Terms of Trade and the Real Exchange Rate . . . . . . . 3739.4Sudden Stops . . . . . . . . . . . . . . . . . . . . . . . . . . . 3769.59.4.1A Sudden Stop Through the Lens of the TNT Model . 3779.4.2The Argentine Sudden Stop of 2001 . . . . . . . . . . 3809.4.3The Icelandic Sudden Stop of 2008 . . . . . . . . . . . 383The TNT Model with Sectoral Production . . . . . . . . . . . 3869.5.1The Production Possibility Frontier . . . . . . . . . . 3879.5.2The PPF and the Real Exchange Rate . . . . . . . . . 3939.5.3The Income Expansion Path . . . . . . . . . . . . . . 3969.5.4Partial equilibrium9.5.5General Equilibrium . . . . . . . . . . . . . . . . . . . 4089.5.6Sudden Stops and Sectoral Reallocations . . . . . . . 412. . . . . . . . . . . . . . . . . . . 4009.6Productivity Differentials and Real Exchange Rates: The Balassa-Samuelson Model 4169.7Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 4229.8Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42510 International Capital Market Integration44110.1 Covered Interest-Rate Parity . . . . . . . . . . . . . . . . . . 443

CONTENTSix10.2 Empirical Evidence on Covered Interest-Rate Differentials . . 44710.3 Empirical Evidence on Offshore-Onshore Interest Rate Differentials45010.4 Uncovered Interest Rate Parity . . . . . . . . . . . . . . . . . 45310.4.1 Asset Pricing in an Open Economy . . . . . . . . . . . 45510.4.2 CIP as an Equilibrium Condition . . . . . . . . . . . . 46010.4.3 Is UIP an Equilibrium Condition? . . . . . . . . . . . 46010.4.4 Carry Trade as a Test of UIP . . . . . . . . . . . . . . 46210.4.5 The Forward Premium Puzzle . . . . . . . . . . . . . . 46410.5 Real Interest Rate Parity . . . . . . . . . . . . . . . . . . . . 46610.6 Saving-Investment Correlations . . . . . . . . . . . . . . . . . 47110.7 Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 47710.8 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48011 Capital Controls48511.1 Capital Controls and Interest Rate Differentials . . . . . . . . 48611.2 Macroeconomic Effects of Capital Controls . . . . . . . . . . 49211.2.1 Effects of Capital Controls on Consumption, Savings, and the Current Account49211.2.2 Effects of Capital Controls on Investment . . . . . . . 49911.2.3 Welfare Consequences of Capital Controls . . . . . . . 50011.3 Quantitative Restrictions on Capital Flows . . . . . . . . . . 50111.4 Borrowing Externalities and Optimal Capital Controls . . . . 50611.4.1 An economy with a debt-elastic interest rate . . . . . 50711.4.2 Competitive Equilibrium without Government Intervention51011.4.3 The Efficient Allocation . . . . . . . . . . . . . . . . . 51411.4.4 Optimal Capital Control Policy . . . . . . . . . . . . . 517

xCONTENTS11.5 Capital Mobility in a Large Economy . . . . . . . . . . . . . . 51911.6 Graphical Analysis of Equilibrium under Free Capital Mobility in a Large Economy52711.7 Optimal Capital Controls in a Large Economy . . . . . . . . 53411.8 Graphical Analysis of Optimal Capital Controls in a Large Economy54311.9 Retaliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54511.10Summing Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 55311.11Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55512 Nominal Rigidity, Exchange Rate Policy, and Unemployment56712.1 An Open Economy with Downward Nominal Wage Rigidity . 56912.1.1 The Supply Schedule . . . . . . . . . . . . . . . . . . . 57112.1.2 The Demand Schedule . . . . . . . . . . . . . . . . . . 57512.1.3 The Labor-Market Slackness Condition . . . . . . . . 58312.2 Adjustment to Shocks with a Fixed Exchange Rate . . . . . . 58512.2.1 An Increase in the World Interest Rate. . . . . . . . 58512.2.2 A Decrease in the World Interest Rate . . . . . . . . . 59112.2.3 Output and Terms of Trade Shocks . . . . . . . . . . . 59312.2.4 Volatility and Average Unemployment . . . . . . . . . 59712.3 Adjustment to Shocks with a Floating Exchange Rate . . . . 59912.3.1 Adjustment to External Shocks . . . . . . . . . . . . . 60012.3.2 Supply Shocks and the Inflation-Unemployment Tradeoff60512.4 The Monetary Policy Trilemma. . . . . . . . . . . . . . . . 60912.5 Boom-Bust Cycles . . . . . . . . . . . . . . . . . . . . . . . . 61112.5.1 The Mechanics of a Boom-Bust Cycle . . . . . . . . . 61212.5.2 The Currency-Peg Externality . . . . . . . . . . . . . 615

CONTENTSxi12.5.3 The Boom-Bust Cycle in Peripheral Europe: 2000-201161612.6 A Numerical Example of a Boom-Bust Cycle . . . . . . . . . 62012.6.1 The Pre-Shock Equilibrium . . . . . . . . . . . . . . . 62112.6.2 A Boom-Bust Cycle with a Fixed Exchange Rate . . . 62312.6.3 Adjustment Under a Flexible Exchange-Rate Regime . 62512.7 Managing a Currency Peg. . . . . . . . . . . . . . . . . . . 62812.7.1 Fiscal Devaluations . . . . . . . . . . . . . . . . . . . . 62912.7.2 External Inflation. . . . . . . . . . . . . . . . . . . . 63912.7.3 Capital Controls . . . . . . . . . . . . . . . . . . . . . 64612.8 Exchange-Rate Overshooting . . . . . . . . . . . . . . . . . . 65112.9 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65813 Monetary Policy and Nominal Exchange Rate Determination 67113.1 The quantity theory of money . . . . . . . . . . . . . . . . . . 67213.1.1 A floating (or Flexible) Exchange Rate Regime . . . . 67413.1.2 Fixed Exchange Rate Regime . . . . . . . . . . . . . . 67513.2 Fiscal deficits, inflation, and the exchange rate . . . . . . . . 67613.2.1 The Demand For Money . . . . . . . . . . . . . . . . . 67713.2.2 Purchasing power parity (PPP) . . . . . . . . . . . . .