Open access until 21 January 2025 for the paper in JIMF, paper coauthored with Hiro Ito:
We re-examine the determinants of current account balances (CAB) and the saving-investment nexus with focus on emerging market and developing economies (EMDEs). We are in a new age in terms of facing not just economic challenges but also other non-economic challenges such as global climate changes, increasing natural disasters, and wars. We face the need to reexamine the determinants of CAB along with national saving and investment. We first take an event study approach, examining how these variables have evolved historically in the wake of wars, natural disasters, and pandemics. The second is a cross-country panel investigation of CAB, national saving, and of investment. In the presence of global financial instability, EMDEs tend to experience an improvement in CAB due to a fall in investment. A rise in oil prices increases both national saving and investment, but the change in investment is greater than the change in national saving, which worsens CAB. Contractionary monetary policy by the U.S. Federal Reserve Board tends to lower both national saving and investment, but the impact on CAB is not statistically different from zero. The more frequently a country experiences wars, on average, its CAB tends to improve. When a climatological or geographical disaster happens, all of its CAB, national saving, and investment tend to improve. A rise in the level of U.S. monetary policy uncertainty leads to an
improvement in CAB, mainly due to a fall in investment.
So, the series being studied is the current account balance, but the proximate cause of change is the capital account? Seems that way, based on your findings.
The current account balance is a mirror image of the capital account balance. The current account balance shifts toward surplus – the capital account shifts toward deficit – when there’s a fall in net foreign investment inflow to emerging markets, such as when:
– there is global financial instability
– The Fed maintains contractionary monetary policy (not statistically signigicant, but see next item)
– Fed policy uncertainty rises
– Oil prices fall and cause a decline in net investment inflows greater than the decline in saving
– The country is at war, or prone to war
– The country suffers natural disaster
So where are we in today’s world? On the plus side:
OFR finds financial stability to be better than average in the U.S., developed economies and emerging markets:
https://www.financialresearch.gov/financial-stress-index/
On the minus side:
– The Institute for Economics & Peace (IEP) finds “(t)here are currently 56 conflicts, the most since World War II. They have become more international with 92 countries involved in conflicts outside their borders…”
https://www.visionofhumanity.org/highest-number-of-countries-engaged-in-conflict-since-world-war-ii/
– Fed policy has been tight and uncertainty elevated.
– We have strong reason to believe that natural disasters are on the rise. We should, however exercise caution in using standard data sets, which may exaggerate the increase:
https://ourworldindata.org/disaster-database-limitations
Oil prices? Not sure how to score this one. The five and ten-year price trend is up, the one-year trend down.
So that’s one indicator that’s positive for capital flows to emerging economies, negative for the current account balance, three negative for capital flows, positive for the current account balance, and one, oil prices, that I’ll leave for Menzie to score.
Couple of thoughts:
A neutral or positive current account balance is, if I understand the world rightly, good for stability, but weak foreign investment is not necessarily good for growth. And this study suggests that it is mostly a risky investment environment which pushes emerging market current accounts toward surplus.
What’s good for emerging market current account balances must, necessarily, be bad for somebody else’s current account balance. Who’s left? Developed economies. Who’s the special case among developed economies? The U.S. is.
In a recent comment, I linked to an FT article which points out the recent extraordinary flow of capital into U.S. markets from abroad. The author warned of a U.S. investment bubble. That is the same warning that emerging markets face when they enjoy big, rapid capital inflows. Foreign flows tend to be more skittish than domestic flows. “Skittish” is a two-edged sword for the U.S., but still a risk.
By the way, kudos. You and Ito are really cranking out the work. Nice job.
Off topic – FBI will vet Trump appointees:
https://www.cnn.com/2024/12/03/politics/trump-transition-justice-department-agreement/index.html
The Senate will almost certainly hold hearings, and Democratic senators will see the result of FBI investigations. No Gaetz/Hegseth also-rans waltzing into high office with a closet full of undisclosed crimes. Maybe Kavanaugh/Thomas-style lipstick-on-a-pig investigations and hearings, though. That’s where we live now.
Off topic – It’s looking like South Korea’s political problems may become supy-chain problems:
https://www.yahoo.com/news/south-koreas-largest-labor-union-115500578.html
For the U.S., ceetain microchips could be in short supply pretty quickly.
Here’s Bloomberg’s Authers on market reaction to the declaration of martial law:
https://archive.ph/fNXEl
Like many pundits, Authers declares the brief attempt at martial law to have been a surprise. A look at the history of South Korean presidents’ behavior toward their predecessors and their individual fates does suggest that sophisticated investors in South Korea may not have been utterly shocked. Coup, assassination, and imprisonment are more common than a quiet retirement.
Labor action to force impeachment or resignation may be a bigger risk to asset prices than politics. Korea’s economy putters along quite nicely despite an ugly political history.