The Current Account and Balance of Payments: Implications towards the Real Exchange Rate, GDP Growth, Asset Prices and Stability

• Název práce v češtině: Běžný účet platební bilance: dopady na reálný směnný kurz, růst HDP, cenu aktiv a stabilitu
• Název v anglickém jazyce: The Current Account and Balance of Payments: Implications towards the Real Exchange Rate, GDP Growth, Asset Prices and Stability
• Klíčová slova: Běžný účet, RER, HDP, aktiva
• Klíčová slova anglicky: Current Account, Real Exchange Rate, GDP, Assets
• Akademický rok vypsání: 2020/2021
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: PhDr. František Čech, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 24.02.2021
• Datum zadání: 24.02.2021
• Datum a čas obhajoby: 31.01.2022 08:00
• Místo konání obhajoby: Pekařská 16, JPEK312, 312, Malá učebna, 3.patro
• Datum odevzdání elektronické podoby: 11.01.2022
• Datum proběhlé obhajoby: 31.01.2022
• Oponenti: PhDr. Jaromír Baxa, Ph.D.

Zásady pro vypracování

Topic characteristics / Research Question(s):
My thesis pertains to the following general research questions: What role does the Balance of Payments have on the Real Exchange Rate? How does the Balance of Payments affect GDP growth in the long-run? What is the relationship between Current Account deficits and asset prices? What are the broad implications of countries that run persistent Current Account deficits?

Seznam odborné literatury

Altayligil, Y.B., Çetrez, M. (2020), “Macroeconomic, institutional and financial determinants of current account balances: a panel data assessment.” Economic Structures 9, 49. https://doi.org/10.1186/s40008-020-00225-1
Aoki, K, G Benigno, and N Kiyotaki (2009), “Capital flows and asset prices”, NBER International Seminar on Macroeconomics 2007, University of Chicago Press: 175–216.
Arghyrou, M. G. And Chortareas, G. (2008), “Current Account Imbalances and Real Review of International Economics“, 9(5), 747–764, 2008 DOI:10.1111/j.1467-9396.2008.00773.x
Ferrero, A (2011), “House prices booms and current account deficits”, Society for Economic Dynamics Meeting Paper 1386.
Ferrero, A (2012), “House price booms, current account deficits, and low interest rates”, Federal Reserve Bank of New York Staff Report 541.
Kaldor N. (1980) The Foundations of Free Trade Theory and their Implications for the Current World Recession. In: Malinvaud E., Fitoussi JP. (eds) Unemployment in Western Countries. International Economic Association Publications. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-16407-3_4
Minsky, Hyman P. (1975). John Maynard Keynes. New York : Columbia University Press
Romelli, D., Terra, C., & Vasconcelos, E. (2018). Current account and real exchange rate changes: The impact of trade openness. European Economic Review, 105, 135–158. doi:10.1016/j.euroecorev.2018.03.009
Sadiku, L., Fetahu, M., Sadiku, M., Berisha, N. (2015), “The Persistence and Determinants of Current Account Deficit of FYROM: An Empirical Analysis”. Procedia Economics and Finance 33:90-102 DOI: 10.1016/S2212-5671(15)01696-2
Sumner, S. (2020) “Currency Manipulation, Saving Manipulation, and the Current Account Balance.” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA
Thirlwall, A. P. & Hussain, M. N. (1982). "The Balance of Payments Constraint, Capital Flows and Growth Rate Differences between Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 498-510, November.
Tymoigne, É (2006), “Asset prices, financial fragility, and central banking”, Working Paper, No. 456, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY

Předběžná náplň práce

Scholars such as Sumner (2020) would argue that Current Account (CA) deficits and surpluses are not a major issue for countries, while others like Reisen (1997) would not put too much concern unless they run persistent deficits. The relationship between the Real Exchange Rate (RER), Balance of Payments BoP and interest rates are explored through the work of authors such as Arghyrou and Chortareas (2008). A vast literature of balance-of-payments-constrained growth (BPCG) models has been developed by Thirlwall (1982) and others. An area of literature on the subject of asset prices and the CA has been built upon the work such as Ferrero (2011, 2012) who found a correlation between rising asset prices of the 2000s and CA deficits, in addition to changes in the interest rate channel. The macroeconomic indicators that serve as determinants of the CA has been explored in depth within the literature, including by Sadikua, et al. (2015) and Altayligil and Çetrez (2020). Further, ideas of macroeconomic instability can be explored through the writings of Kaldor (1980) and by the newer work of Febrero, Uxo and Bermejo (2018) regarding BoP crises in practice related to persistent CA deficits. Additionally, ideas concerning financial instability by Minsky (1975) can be utilized with research by Tymoigne (2006) and others to demonstrate how asset price increases and financial imbalances can lead to financial crises. These pieces of work can be used to examine the relationship between CA deficits and macroeconomic instability through the possibility of BoP and financial crises.

In this thesis, we explore the role of current account deficits on the Real Exchange Rate. We will examine the various issues that can arise from imbalances in the CA, including countries that run into BoP issues, as well as exploring the linkages between asset prices, interest rates, the CA and financial stability. Data will come from countries’ own data collection agencies (e.g. Australian Bureau of Labor Statistics, US Bureau of Labor Statistics, etc.) as well as other data sources (e.g. Case-Shiller Home Price Index, S&P 500 Index, etc.). We will try to empirically verify my hypotheses by creating models to test against the available data, with a particular focus on Australia, the US and the UK.

Working hypotheses:

1. Hypothesis #1: The Real Exchange Rate has a long-run cointegration relationship with the current account balance.
2. Hypothesis #2: That current account deficits and surpluses influence GDP growth, particularly in the long-run.
3. Hypothesis #3: Greater current account deficits lead to increased asset prices.
4. Hypothesis #4: Current account deficits endanger a country towards balance of payments and financial crises.

Methodology:
For the RER portion of the thesis, we will review the available literature, and employ a cointegration model that will attempt to control for other variables (such as openness to trade or interest rates) to see the significance that the CA balance plays toward the RER. We will focus on the countries such as US, UK and Australia, preferably in the years ranging from 1973-2018, utilize methods similar to those demonstrated in Romelli et al (2018), and employ Granger Causality tests to study the relationship between BoP and the RER. We will use standard procedures to test for autocorrelation (e.g. Portmanteau test) given macroeconomic data’s possibility of depending on each other. Since the majority of financial data sets do not have constant variance, if there exists autocorrelation and heteroskedacity within the data, we will select a method that is robust for them. For the portion concerning Balance of Payments and Financial crises, we will review the work of economists such as Kaldor and Minsky, utilizing the lens of historical institutionalism.

Předběžná náplň práce v anglickém jazyce

Scholars such as Sumner (2020) would argue that Current Account (CA) deficits and surpluses are not a major issue for countries, while others like Reisen (1997) would not put too much concern unless they run persistent deficits. The relationship between the Real Exchange Rate (RER), Balance of Payments BoP and interest rates are explored through the work of authors such as Arghyrou and Chortareas (2008). A vast literature of balance-of-payments-constrained growth (BPCG) models has been developed by Thirlwall (1982) and others. An area of literature on the subject of asset prices and the CA has been built upon the work such as Ferrero (2011, 2012) who found a correlation between rising asset prices of the 2000s and CA deficits, in addition to changes in the interest rate channel. The macroeconomic indicators that serve as determinants of the CA has been explored in depth within the literature, including by Sadikua, et al. (2015) and Altayligil and Çetrez (2020). Further, ideas of macroeconomic instability can be explored through the writings of Kaldor (1980) and by the newer work of Febrero, Uxo and Bermejo (2018) regarding BoP crises in practice related to persistent CA deficits. Additionally, ideas concerning financial instability by Minsky (1975) can be utilized with research by Tymoigne (2006) and others to demonstrate how asset price increases and financial imbalances can lead to financial crises. These pieces of work can be used to examine the relationship between CA deficits and macroeconomic instability through the possibility of BoP and financial crises.

In this thesis, we explore the role of current account deficits on the Real Exchange Rate. We will examine the various issues that can arise from imbalances in the CA, including countries that run into BoP issues, as well as exploring the linkages between asset prices, interest rates, the CA and financial stability. Data will come from countries’ own data collection agencies (e.g. Australian Bureau of Labor Statistics, US Bureau of Labor Statistics, etc.) as well as other data sources (e.g. Case-Shiller Home Price Index, S&P 500 Index, etc.). We will try to empirically verify my hypotheses by creating models to test against the available data, with a particular focus on Australia, the US and the UK.

Working hypotheses:

1. Hypothesis #1: The Real Exchange Rate has a long-run cointegration relationship with the current account balance.
2. Hypothesis #2: That current account deficits and surpluses influence GDP growth, particularly in the long-run.
3. Hypothesis #3: Greater current account deficits lead to increased asset prices.
4. Hypothesis #4: Current account deficits endanger a country towards balance of payments and financial crises.

Methodology:
For the RER portion of the thesis, we will review the available literature, and employ a cointegration model that will attempt to control for other variables (such as openness to trade or interest rates) to see the significance that the CA balance plays toward the RER. We will focus on the countries such as US, UK and Australia, preferably in the years ranging from 1973-2018, utilize methods similar to those demonstrated in Romelli et al (2018), and employ Granger Causality tests to study the relationship between BoP and the RER. We will use standard procedures to test for autocorrelation (e.g. Portmanteau test) given macroeconomic data’s possibility of depending on each other. Since the majority of financial data sets do not have constant variance, if there exists autocorrelation and heteroskedacity within the data, we will select a method that is robust for them. For the portion concerning Balance of Payments and Financial crises, we will review the work of economists such as Kaldor and Minsky, utilizing the lens of historical institutionalism.