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.

Economic Sanctions

Chapter 3 covers U.S. government economic sanctions, which may be imposed upon entire countries (as embargoes), specified economic sectors, or individual state or nonstate actors. These comprise approximately thirty different programs that are governed principally by the International Emergency Economic Powers Act (IEEPA), various other sanctions legislation, and the regulations of the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). The chapter explains: which types of transactions are subject to the OFAC regulations; the basis and criteria for those restrictions; how to determine whether your transaction is prohibited without a license and, if so, whether you are likely to get a license for it; how to seek a license if one is required; and the potential penalties for violating the rules. The chapter also explains how the OFAC regulations relate to the regulatory regimes covered in other parts of the book.

Biden Administration Rescinds Sanctions Against International Criminal Court Officials

On April 1, 2021, the Biden administration issued an executive order reversing the Trump administration's sanctions on International Criminal Court (ICC) personnel. The administration rescinded the sanctions placed upon the ICC prosecutor, Fatou Bensouda, and the head of the Office of the Prosecutor's Jurisdiction, Complementarity, and Cooperation Division, Phakiso Mochochoko, and removed the officials from the Treasury Department's Office of Foreign Assets Control List of Specially Designated Nationals and Blocked Persons. The ICC, European Union (EU), and human rights groups welcomed the reversal.

External balance sheets of emerging economies: low-yielding assets, high-yielding liabilities

The new millennium has witnessed a rapid expansion of external balance sheets and significant changes in the capital, currency and sectoral compositions of foreign assets and liabilities of emerging economies. These have created new channels of transmission of global financial shocks and amplified the susceptibility of the value of their outstanding stocks of gross foreign assets and liabilities to global financial conditions, leading to sizeable wealth transfers between emerging and advanced economies. They have also resulted in significant income transfers in view of negative yield differentials between their gross external assets and liabilities. Altogether, such transfers to advanced economies are estimated to have reached 2.3 per cent of the combined GDP of the G20 emerging economies per annum during 2000–2016.

Explaining global imbalances: the role of central-bank intervention and the rise of sovereign wealth funds

Neoclassical economic theory views current-account imbalances as the result of (individual) decisions to save more than to invest domestically. Monetary analysis in the Keynesian tradition rejects such approaches and emphasizes that a country's net savings are the result, not the cause, of net selling of goods and services to foreigners. The latter, in turn, depends on global demand patterns and absolute advantages between countries. We complement this Keynesian approach, taking a closer look at the financial account of the balance of payments: a necessary condition for countries to net-sell goods and services to foreigners is the willingness of domestic sector(s) to accumulate net foreign assets. While previous analysis of global imbalances has partially discussed the role of central banks' reserve accumulation it has failed to incorporate the macroeconomic role of sovereign wealth funds (SWFs). We analyse eight surplus countries' external positions and find that the public sector typically purchases and manages significant amounts of foreign assets via both central banks and SWFs. This, in turn, supports current-account surpluses. We then consider the particular case of Switzerland where, contrary to other surplus countries, public-sector purchases of foreign assets had been absent for a long time, yet set in massively after 2008.

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.