Global Imbalances and Settlement Currency: Trade, Finance, and Macroeconomy

Global Imbalances and Settlement Currency: Trade, Finance & Macroeconomy Apostolos Apostolou 37th Annual Monetary and Trade Conference: Global Trade: Darkening Clouds or New Beginnings?

The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

Stylized Fact I: Persistent current accounts USA EA EMDE excl China

Current account (percent of world GDP) 2.5

China AE excl. US and EA

2 1.5 1 0.5 0 -0.5 -1 -1.5 -2 1999

2001

Sources: IMF WEO

2003

2005

2007

2009

2011

2013

2015

2017

Stylized Fact II: World trade ↑ & UST10Y yield ↓ World trade and yields (percent) 140

World Exports as % US NGDP (LHS) UST 10Y (yield) 16 14

120

12

100

10

80

8 60

6

40

4

20

2

0

0

1981

1988

Sources: FED FRED and WTO

1995

2002

2009

2016

Stylized Fact IIIa: USD in FX markets FX turnover (percent) 95 US dollar 90

85

80

75

1995

1998

2001

2004

Sources: BIS Triennial Central Bank Survey

2007

2010

2013

2016

Stylized Fact IIIb: USD Dominant in Payments Settlement International payments currency based on value (percent) 60 50 40 30 20 10 0 2014 Sources: SWIFT

2015

2016

2017

2018

2019

Stylized Fact IV: Labor share as % GDP ↓ Share of Labor Compensation in US GDP (percent)

64

62

60

58

Sources: FED FRED

Global Imbalances: Some literature I

Gourinchas and Rey (2007) adjustment could take place through differences in the returns foreigners receive from holding U.S. assets compared to the returns U.S. residents receive on foreign assets.

I

Gourinchas et al. (2010), regard the U.S. as a global insurer able to provide insurance against adverse shocks

I

Caballero et al. (2008a), build a model of global imbalances, emphasizing one internationally traded safe asset

I

Mendoza et al. (2009), build a model with different levels of financial development, leading to large and persistent global imbalances, as countries with deeper financial markets decrease savings and borrow from abroad

I

Gopinath and Stein (2018), find that U.S. dollar invoicing reduces borrowing rates

A two-country model with a dominant settlement currency

I

Model builds on Corsetti and Pesenti (2005), (2009)

I

Home (H) and Foreign (F) countries

I

Each country consumes 2 goods: Home and Foreign

I

Monopolistic competition setting

I

Foreign country pays for some imports in the Home currency (dominant settlement currency)

I

Money supply defines consumption

I

Firms use labor as input.

model

Result I: Home Trade Deficit ↑ 1.10

Consumption/GDP

1.08

1.06

1.04

1.02

gM (percent) 1.00

1

2

3 σ=0.25

4

5 σ=0.5

6

7 σ=0.8

8

9

10

σ=0.9

Figure : The Home trade balance deteriorates the more the Foreign consumer uses Home currency to pay for imports

Result II: Home Utility ↑ 1.08

U

1.06

1.04

1.02

gM (percent) 1.00 1

2

3

σ=0.25

4

5

σ=0.5

6

7

σ=0.8

8

9

10

σ=0.9

Figure : Home utility (U) increases the more the Foreign consumer uses Home currency to pay for imports

Result III: Home Labor Effort ↓ 1.00

l

0.99

0.98

0.97

0.96

gM (percent) 0.95 1

2

3 σ=0.25

4

5 σ=0.5

6

7 σ=0.8

8

9

10

σ=0.9

Figure : Home Labor effort (l) decreases the more the Foreign consumer uses Home currency to pay for imports

Results IV: Home Interest Rate ↓

4

interest rate (percent)

Value suggested by SWIFT data (~50 percent)

3.5 β=0.1

3

β=0.2

2.5

β=0.3 β=0.4

2

β=0.5

1.5 1 0.5 0

σ=0.001

σ=0.025

σ=0.1

σ=0.3

σ=0.5

σ=0.7

σ=0.9

Figure : US interest rates reduction as the proportion of RoW imports settled in U.S. dollars increases (1980-2016) model

Correlation in the data 10

UST 10 (percent)

9 8 7 6 5 4 3

R² = 0.8196

2 1 RoW FCE

0 0

10,000

20,000

30,000

40,000

50,000

Figure : Negative correlation between US interest rates and the RoW final consumption expenditure

Some Empirical evidence

(UST 10)t = c + β1

US FCEt US Bondst

+ β2

RoW FCEt US Bondst

+ β3

Table : OLS regression results c (US FCE)/(US Bonds) (RoW FCE)/(US Bonds) (US Int Inc)/(US Bonds) R2

(1) 8.6674 (1.4382) 1.5190 (0.4192) -0.4619 (0.2171) -275.4584 (31.6607) 0.8008

US Int Inct US Bondst

Main Findings & Final Comments

Settlement currency has macrofinancial effects such as: I

Lower US rates

I

Contributes to global imbalances

I

Consumption and labor shifts

Reversal of global trade trends is likely to have macrofinancial effects

Background Slides: Theoretical Model

Households and Consumption I

A NOEM framework with a continuum of households, all identical. The Home consumer utility: Ut = ζ t [ln Ct − κlt ] , κ > 0

→ ζ < 1 is the discount factor, Ct is consumption, κ is the disutility of labor and lt is the labor effort I

The consumption index is: Ct = [Ct (H)]α [Ct (F )]1−α

I

Each brand an imperfect substitute with CES θ.

Z 0 back

1

θ

[Ct (H, j)] θ−1 dj

Ct (H) =

θ θ−1

1

Z

θ

[Ct (F , j)] θ−1 dj

; Ct (F ) = 0

θ θ−1

Monetary Policy, Firms, Technologies and Sales I

The monetary policy defines nominal consumption as: µt = Pt Ct

I

The monetary policy stance of Home and Foreign country is: µt = Pt Ct + σβεt Pt∗ Ct∗ ;

µ∗t = (1 − β) Pt∗ Ct∗ + (1 − σ)βPt∗ Ct∗

→ σ is the share of Foreign imports settled in the Home currency I

The demands are:

Yt (j) = α

Yt∗ (j) = (1 − α) I

Pt (H, j) Pt (H)

Pt (F , j) Pt (F )

−θ

−θ

∗ Pt Ct Pt (H, j) −θ Pt∗ Ct∗ +β Pt (H) Pt∗ (H) Pt∗ (H)

∗ Pt (F , j) −θ Pt∗ Ct∗ ∗ Pt Ct + (1 − β) P (H) Pt (F ) Pt∗ (F ) Pt∗ (F ) t

Technologies are given by: Yt (j) = Zt lt (j);

Zt denotes labor productivity. back

Yt∗ (j) = Zt∗ lt∗ (j)

Budget Constraint and Exchange Rate I

Budget constraint is: 1 d,F 1 d,F ∗d,F M + Mt∗d,F + Pt∗ Ct∗ = St∗ (F ) + Mt−1 + Mt−1 + Tt∗ εt t εt

I

Nominal exchange rate is: εt =

1 − σβ µt 1 − α

µ∗t β 1 + σ (1 − α) +

gtM 1+gtM

→ gtM is the growth in the Foreign demand for Home currency I

Nominal consumption ratio between Home & Foreign is: Q̃t =

back

εt Pt∗ Ct∗ 1−α 1 = Pt Ct β 1+σ

gtM 1+gtM

Dynamic: Bond Holdings and Interest Rate I

The bond market clears when: BtH + Bt∗H = BtF + Bt∗F = 0

I

The budget constraint is:

(1−α)Pt Ct = εt Pt∗ Ct∗ 1 +

gtM H ∗H σ β−Bt+1 −εt Bt+1 +(1+it )BtH +εt (1+it∗ )Bt∗H 1 + gtM

→ i and i ∗ are the interest rates on Home and Foreign bonds I

The reduction in the interest rate paid by the Home country: ĩt =

→ Balanced growth path. back

gM εt Pt∗ Ct∗ 1+g σβ M

BtH