Emerging Markets Interest Rates, International Reserves and Net Foreign Assets

In the context of a managed float regime, we adopt the portfolio balance view to show the effects of the net foreign assets of an economy and its gross international reserves level on interest rate differentials. We argue that the interest rate differential can be explained by three components, where the components are the expected depreciation of the domestic currency, a default risk premium, and a portfolio balance premium. Our theoretical analysis suggests that the interest differential is a convex function of the level of gross international reserves. In particular, the differential and gross reserves are inversely related at low levels of reserves, but positively at higher levels. We evaluate our framework for the case of Lebanon. We find that the differential is inversely related to both net foreign assets and gross international reserves. These findings are then confirmed with data from Indonesia and Mexico.

Domestic Credit and the Balance of Payment Deficit: Evidence from a Heterogeneous Panel of Five Selected Mena Countries

This study investigated the relationship between domestic credit and net foreign assets in the long run through the monetary approach to the balance of payments (MABP) for a panel of five selected MENA countries (Jordan, Egypt, Algeria, Morocco, Tunisia) during the period extending from 1980 to 2019. It employed the second-generation methods in panel data analysis to deal with cross-sectional dependence (CSD) and slope heterogeneity. According to the panel results for Common Correlated Effects Mean Group (CCEMG) and Augmented Mean Group (AMG) estimators, domestic credit has a significant negative impact on net foreign assets in the long run. The country-specific results for the AMG estimator strongly supported the MABP propositions in Jordan, Morocco, and to a lesser extent, in Egypt and Algeria. As for Tunisia, the results do not conform with what MABP predicted. The implicit conclusion is that an increase in domestic credit causes a continuous loss of net foreign assets in Egypt, Jordan, Morocco, and Algeria. Thus, monetary authorities should formulate an appropriate monetary policy to control the domestic credit creation as a mechanism toward improving the balance of payment (BOP) position. Furthermore, the policymakers should concentrate on other policy instruments to correct the BOP deficit rather than focusing on monetary tools, especially in Tunisia, where the findings showed that BOP was not a monetary phenomenon.

Why did the United States Evolve from the Largest International Creditor in 1980 to the Largest International Debtor in 1990?

Remarkable transformation of the U.S. international investment position occurred over the last 40 years. U.S. net foreign assets were larger than combined net foreign assets of all other creditors. By 1990, foreign-owned U.S. securities and real assets were larger than U.S. owned foreign securities and assets. This change occurred without the U.S. Treasury borrowing in foreign currency and few U.S. firms borrowing, reflecting a surge in foreign purchases of U.S. securities. Inferences from the currency composition of portfolio changes of those who acquired U.S. dollar securities suggest that foreign savers took the initiative on cross-border investment inflows. The U.S. could not have developed a larger capital account surplus after 1980 unless a similar increase in the U.S. current account deficit occurred. The primary factor that led to the U.S. current account deficit increase was the surge in U.S. stocks and other asset prices, resulting in a U.S. household wealth surge and consumption boom. The foreign saving inflow displaced domestic saving. In addition, an increase in the price of the U.S. dollar led to expenditure-switching from U.S. goods to increasingly less expensive foreign goods. When investor demand for U.S. dollar securities declined, the U.S. dollar price fell in 1992, 2002, and 2020 and the price of U.S. dollar securities declined. The paper discusses the source of the change in the U.S. international investment position, the flow of foreign saving to the U.S., cyclical variability in the foreign saving flow to the U.S., and the potential impact of an adjustable parity arrangement.

Test of Monetary Approach to Balance of Payments in West Africa Monetary Zone

This research tested the monetary approach to Balance of Payment in developing countries of West Africa in order to affirm whether the specified relationship in the approach depicts correctly the actual behaviour of the economies. Time series and cross-sectional data that ranges from 1970 – 2016 were used. The empirical results of the fixed effect model established a significant positive relationship between net domestic credit, interest rate and exports; an insignificant positive relationship between capital movements, imports, income and the dependent variable. Exchange rate, however, had a significant negative relationship with the net foreign assets, while inflation had an insignificant but negative relationship with net foreign assets. The pairwise causality tests indicated a unidirectional relationship between exchange rate, net domestic credit and net foreign assets while the other variables move independently and cannot granger cause net foreign assets. Hence, the study concludes that the Polak model is valid in the West Africa Monetary Zone despite the fact that they are no more operating a fixed exchange rate system. The study suggests that the attention of the monetary authorities and the governments should not only be on decreasing the money supply in the economy, since an increase in net domestic credits has a positive impact on the net foreign assets provided it is channeled towards domestic production.

Republic of Equatorial Guinea

Macroeconomic imbalances have narrowed in the last few years, supported by fiscal consolidation. However, the economic situation and outlook remain difficult, with the economy still in deep recession. GDP is expected to contract for the sixth consecutive year in 2019, driven by a continued strong decline in hydrocarbon output and a stagnant non-oil sector. Imputed net foreign assets (NFAs) at the BEAC turned positive in mid-2019 but are very low. The banking sector remains weak, with high non-performing loans related to government arrears, hindering the recovery of the non-oil sector. The outlook is expected to improve over the medium term, with a gradual recovery of the non-hydrocarbon sector—helped by arrears clearance—and the coming on stream of new hydrocarbon projects, and a strengthening of the external position supported by fiscal consolidation. Risks to the outlook are broadly balanced, with the possibility of lower oil prices offset by upside on hydrocarbon output.

The Transfer Problem Surfaces in Sub-Saharan Africa: Net Foreign Assets, Financial Liberalization and Real Exchange Rates

This paper presents new links among net foreign assets (NFA), financial liberalization, and the real exchange rates in Sub-Saharan Africa (SSA), utilizing a testable theoretical model inspired by Lane and Milesi-Ferreti (2004) and newly constructed data sets for real exchange rates, net foreign assets, and financial liberalization. First, we check for the existence of a transfer problem – the hypothesis that increases in NFA strengthen the real exchange rates. Second, we examine how real exchange rates have reacted to financial liberalization in SSA. Finally, we explore whether financial liberalization dampens the effects of a transfer problem. Empirical analysis, using cross-country data, confirms the existence of a transfer problem that decreases with increases in trade openness in SSA. We also find that, overall, countries with financial liberalization have more depreciated real exchange rates and that financial liberalization dampens the transfer problem so that the semi-elasticity of NFA becomes negative, implying that financially liberalized SSA countries that experience an increase in net external liabilities would eventually require an appreciated, rather than depreciated, real exchange rate. The results are robust to various model specifications and estimation techniques, inclusion of other determinants of real exchange rates and consideration of endogeneity.

The Validity of Okun’s Law: An Empirical Evidence for Nigeria

This paper empirically investigates the relationship between economic growth and unemployment in Nigeria under the Okun’s Law framework. The Auto Regressive Distributed Lag model approach, the ARDL Bounds Test and Cointegration Test were employed in this paper. Economic Growth was also regressed on unemployment, log of industrial output, log of net foreign assets, log of foreign direct investment and population growth so as to know the impact of these variables on output. The research findings indicated that high the Okun’s specification does not hold in the Nigeria, the impact of economic growth on unemployment is negative and insignificant. We did however find that there is a positive impact of unemployment on economic growth, meaning that the phenomena of jobless growth may be in play in the economy. The Johansen Co-integration test failed to establish evidence of long run relationship between GDP, industrial output, unemployment, foreign direct investment net foreign assets and population growth. The ECM could not be employed because the variables were integrated of different orders. It was however found there exist a significant positive relationship between the aforementioned variables and GDP except for population growth. The government should consider the Industrial Sector as a priority sector in a bid for better economic growth and development. Population control measures should also be put in play to ensure that the population does not exceed the economic carrying capacity. The government should also play an important role in abating unemployment in the economy using direct and indirect schemes and strategies.

THE POLAK’S MONETARY MODEL AND ITS APPLICATION ON MACEDONIAN CASE

Macroeconomic stability is very important for each economy because it constitutes the basis of sustainable economic growth and development. It means stable prices with a low level of inflation (internal stability), a stable foreign exchange rate, a relatively low and sustainable current account deficit in the balance of payments and a solvent position in the external indebtedness of the economy (external stability). International Monetary Fund (IMF) provides financial support to countries that have problems with internal and external stability. The IMF approach to macroeconomic stabilization is based on a so-called “monetary approach” to the balance of payments. The first IMF model designed for dealing with balance of payments disequilibrium was the Polak’s model on monetary programming. Its purpose is to integrate monetary, income and balance of payments analysis, and it represents the basis of the conditionality applied to IMF’s credit arrangements. This model investigates and determines the effect on income and balance of payments arising from the two important variables in the economy: (1) changes in domestic bank credits, and (2) changes in exports of goods and services. In other words, the model indicates what macroeconomics policies are required to achieve a given set of outcomes i.e. it determines policy targets consistent with explicit macroeconomic objectives. It consists of a set of four equations and contains two behavioral relationships: the demand for money function and the function of the demand for imports, and two identities: for the money supply and for the balance of payments. As such, Polak's monetary model extends classical quantitative money theory to the example of an open economy. Republic of North Macedonia, as a developing country that is remarkably open to the world (large share of export and import of goods and services in GDP) and with close cooperation with the IMF, the application of so-called financial programming based on Polak’s monetary model is of special importance. Based on the theoretical elaboration of the equations contained in the Polak’s monetary model, the paper attempts for its application to the case of Republic of North Macedonia and tries to determine and quantify the dependence of the changes in net foreign assets (foreign reserves) and gross domestic product (GDP) from the changes in domestic credits of the Macedonian banking sector. For that purpose, the data on gross domestic product (GDP), money supply (M4) and exports of goods and services for the period 2003-2018 were used from the State statistical office and National bank of the Republic of North Macedonia. By calculating the values of income velocity of money and propensity to import, the interdependence of domestic credits with gross domestic product and net foreign assets of the banking sector is calculated and analyzed.

The Exsistence of Economic Openness and the Strength of Real Exchange Rate

The important findings in this study are; First, economic openness in Indonesia is positively influenced by terms of trade and inflation, while in the Philippines it is positively affected by terms of trade and real exchange rates; Second, the strength of real exchange rates in Indonesia is positively influenced by money supply, net foreign assets, and economic openness, besides that it is negatively affected by inflation, while in the Philippines it is positively affected by the money supply; Third, economic opennes that affect the real exchange rate in Indonesia and the real exchange rate that affects the economic openness in the Philippines.