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Theory predicts that a nation's stochastic intertemporal budget constraint is satisfied if net exports (NX) and net foreign assets (NFA) satisfy an error-correction specification with a residual integrated of any finite order. We test this hypothesis using data for 21 industrial and 29 emerging economies for the 1970-2004 period to search for existence of negative relationship between NX and NFA. The results show that, despite the large global imbalances of recent years, NX and NFA positions are consistent with external solvency. Pooled Mean Group error-correction estimation yields evidence of a statistically significant, negative response of the NX-GDP ratio to the NFA-GDP ratio that is largely homogeneous across countries.
Banks and Banking --- Exports and Imports --- Finance: General --- Bankruptcy --- Liquidation --- International Investment --- Long-term Capital Movements --- General Financial Markets: General (includes Measurement and Data) --- Interest Rates: Determination, Term Structure, and Effects --- Financial Markets and the Macroeconomy --- Finance --- International economics --- Solvency --- Foreign assets --- Emerging and frontier financial markets --- Real interest rates --- Financial sector development --- Debt --- Financial services industry --- Investments, Foreign --- Interest rates --- United States
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An implication of the "globalization hazard" hypothesis is that sudden stops could be prevented by offering foreign investors price guarantees on emerging markets assets. These guarantees create a tradeoff, however, because they weaken globalization hazard by creating international moral hazard. We study this tradeoff using an equilibrium asset-pricing model. Without guarantees, margin calls and trading costs cause Sudden Stops driven by Fisher's debt-deflation process. Price guarantees prevent this deflation by propping up foreign asset demand, but their effectiveness and welfare implications depend critically on the price elasticity of foreign demand and on making the guarantees contingent on debt levels.
Economic policy. --- Electronic books. -- local. --- Globalization. --- Commerce --- Business & Economics --- International Commerce --- Global cities --- Globalisation --- Internationalization --- Economic nationalism --- Economic planning --- National planning --- State planning --- International relations --- Anti-globalization movement --- Economics --- Planning --- National security --- Social policy --- Exports and Imports --- Finance: General --- Investments: Stocks --- Macroeconomics --- International Investment --- Long-term Capital Movements --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Price Level --- Inflation --- Deflation --- Macroeconomics: Consumption --- Saving --- Wealth --- General Financial Markets: Government Policy and Regulation --- International economics --- Investment & securities --- Finance --- Sudden stops --- Stocks --- Asset prices --- Consumption --- Moral hazard --- Capital movements --- Prices --- Financial risk management --- Mexico
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Financial globalization was off to a rocky start in emerging economies hit by Sudden Stops in the 1990s. The surge in foreign reserves since then is viewed as a New Merchantilism in which reserves are a war-chest for defense against Sudden Stops. We conduct a quantitative assessment of this argument using a framework in which precautionary savings affect foreign assets via business cycle volatility, financial globalization, and endogenous Sudden Stops. Our results show that financial globalization and Sudden Stop risk are plausible explanations of the surge in reserves but cyclical volatility, which has declined in the globalization period, is not.
Business cycles --- Equilibrium (Economics) --- Globalization. --- Mathematical models. --- Global cities --- Globalisation --- Internationalization --- International relations --- Anti-globalization movement --- Exports and Imports --- Macroeconomics --- Globalization --- International Investment --- Long-term Capital Movements --- Macroeconomics: Consumption --- Saving --- Wealth --- Globalization: General --- International economics --- Foreign assets --- Sudden stops --- Precautionary savings --- Consumption --- Balance of payments --- External position --- National accounts --- Investments, Foreign --- Capital movements --- Saving and investment --- Economics --- Mexico
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