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Prof. Nikolas A. Müller-Plantenberg
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Universidad Autónoma de Madrid
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- International macroeconomics and finance (in particular balance of payments
problems and exchange rate determination)
- Applied econometrics (in particular time series analysis)
- Japan’s imbalance of payments
In: Michael M. Hutchison and Frank Westermann (editors), Japan’s Great Stagnation: Financial and Monetary Policy Lessons for Advanced Economies, MIT Press, 2006, ISBN 0-262-08347-7, p. 239-266
During the past three decades, Japan's current account experienced five large swings. The yen appreciated considerably in periods when the current account boomed, and it depreciated whenever Japan's external performance weakened. However, there has always been a certain lag in the adjustment of the exchange rate. This paper tries to explain these empirical regularities. It argues that as a result of the large movements of the current account, the flows of cash between Japan and its trading partners fluctuated considerably, which in turn influenced the demand for yen relative to other currencies. To the extent that these cash flows were lagging the current account - primarily because of the Japanese lending abroad - the exchange rate's response to external imbalances occurred with a delay. Based on the estimated maturity structure of Japan's foreign lending, the paper constructs a measure of payment flows across Japanese borders, which is shown to follow the movements of the exchange rate very closely. The empirical findings raise doubts regarding the feasibility of proposals to depreciate the yen in order to help Japan out of its current economic crisis.
[Download paper] | [ResearchGate]
- Balance of payments accounting and exchange rate dynamics
International Review of Economics and Finance, Vol. 19, No. 1, January 2010, p. 46-63
The balance of payments is an accounting identity. Many wonder how the current and capital accounts, which add up to zero, can influence exchange rates. This paper shows how payment flows arising from balance of payments imbalances affect the demands for different currencies in the foreign exchange market over time. Based on a dynamical system approach, the paper demonstrates how international payments evolve depending on the joint dynamic behaviour of different balance of payments components. It finds that international payments and exchange rates interact in fundamentally different ways depending on whether a country restricts its capital inflows and outflows, whether capital flows are accommodating or autonomous and whether the exchange rate is fixed, flexible or, say, governed by a crawling peg. Empirical evidence from major industrial countries as well as from countries hit by currency crises support the paper's theoretical
predictions.
[Download paper] | [ResearchGate] | [Editorial website]
- Boom-and-bust cycles, external imbalances and the real exchange rate
The World Economy, Vol. 40, No. 1, January 2017, p. 56-87
When the current account balance and net capital outflows do not exactly offset each other, international payment flows arise. Payment flows into a country push the real exchange rate up, payment outflows push it down. This article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom-and-bust cycles. It shows that during such episodes, capital inflows first exceed the deficit on current account, strengthening the currency. Later on, when the return on domestic capital reverts to its normal level, the current account recovers, yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level. Case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article's theoretical predictions.
[Download paper] | [ResearchGate] | [Editorial website]
- Currency flows and currency crises
CESifo Economic Studies, Vol.
63, No. 2, 1 June 2017, p. 182-209
According to the most common understanding, currency crises are always and everywhere a monetary phenomenon. Based on a formal theoretical model and ample empirical evidence, this article argues instead that currency crises are always and everywhere about external imbalances. They are usually preceded by booms in consumption, investment, and output. Since part of the added spending falls on imports, output and saving rise less than investment, pushing the current account into deficit. The exchange rate depends on the gap between cumulative capital inflows and the cumulative current account deficit. When the boom starts, this gap is positive and the central bank can hoard reserves and sterilize capital inflows. Yet later, as optimism fades, the gap inevitably turns negative, leading to the depletion of reserves and the collapse of the exchange rate. Panic can lead to precipitous speculative attacks.
[Download paper] | [ResearchGate] | [Editorial website]
- Accounting for current account changes: what matters is spending, not income
Cuadernos Económicos (ICE), No. 94, December 2017, p. 11-31
The intertemporal approach to the current account holds that changes in the current account balance must stem from changes in national income, rather than from changes in aggregate consumption, which is considered smooth. This paper calculates in an exact and intuitive way and for a total of 155 countries to what extent movements of the current account are accounted for by its national income and national spending components. It shows that, contrary to the intertemporal approach, the current account balance is mainly driven by changes in expenditure, not changes in income. What is more, deteriorations of the current account occur during economic booms when national income expands fast, not vice versa as the intertemporal approach suggests. The empirical findings thus support the variable-expenditure hypothesis and are, by and large, the same whether one considers short, medium or long horizons.
[Download paper] | [ResearchGate]
- Price level convergence and purchasing power divergence
With Maria Eleftheriou
International Finance, Vol. 21, No. 1, Spring 2018, p. 71-91
We construct four large datasets of bilateral real exchange rates based on traded good prices (food and clothing, respectively) and broader price indices (CPI and WPI). On these datasets, we run nonparametric regressions to examine how the real exchange rate, the price differential and the nominal exchange rate react to an overvalued real exchange rate over time. In line with the theory we develop, our regressions show the following: First, real exchange rates are mean-reverting. Second, prices converge. Third, price convergence implies purchasing power divergence and thus does not contribute to real exchange rate convergence. Indeed, when price adjustment is fast (as for our traded good price datasets), we even observe diverging nominal exchange rates. Our findings suggest that movements both away from and towards PPP may be less related to traded good price movements than is commonly thought.
[Download paper] | [ResearchGate] | [Editorial website]
- The purchasing power parity fallacy: time to reconsider the PPP hypothesis
With Maria Eleftheriou
Open Economies Review, Vol. 29, No. 3, July 2018, p. 481-515
Traded good prices affect the real exchange rate first through their effect on the overall price level and second through their effect on the nominal exchange rate. Whereas the price level effect, which is positive in sign, is universally recognized, the nominal exchange rate effect, which is negative in sign, is routinely ignored. We calculate to which extent real exchange rate changes are accounted for by traded good prices and other components of the real exchange rate. We find that the nominal exchange rate effect neutralizes the price level effect entirely, suggesting that, contrary to popular belief, good market arbitrage is not conducive to purchasing power parity (the purchasing power parity fallacy). Rather than traded or non-traded good prices, the main driving force behind the real exchange rate is currency market pressure, a variable that, as we argue, is largely determined by the cumulative trade and capital flows of a country.
[Download paper] | [ResearchGate] | [Editorial website]
- Course introduction
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- 2023-2024 - Economía Internacional (16693)
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