international

Trade Deficit Rising!

Since 2017Q1. By Mr. Trump’s own metric, we’re losing. But it’s a stoopid metric for evaluating “unfair”-ness. From the last GDP release (which incorporates March trade release):Figure 1: Net exports to GDP (blue), and net exports excluding petroleum products (red), as a ratio to GDP, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations. Here’s a detail, in nominal dollar terms: Figure 2: Net exports to GDP (blue), and net exports excluding petroleum products (red), both nominal, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations. As noted in numerous instances (EconoFact, Steil/BI), trade deficits usually ...

A Reminder of Why It’s the G-7 and Not G-8

And also why we have sanctions against several Russian citizens, firms and financial institutions. Hint: It has something to do with the orange areas: Source: Euromaidenpress. In particular:Source: Ukrainian Defense Ministry via Euromaidenpress. For those inclined to dismiss the current conflict as merely a civil disorder, I refer them to this historical map. Source: Story of Hawaii Museum.

EconoFact: “What is the National Security Rationale for Steel, Aluminum and Automobile Protection?”

From EconoFact, an update: The Trump administration has implemented a number of trade related measures purportedly on the basis of national security. First, it invoked the seldom-used provision of the trade law to investigate whether imposing import restrictions for steel and aluminum is justified by national security reasons. The Commerce Department’s investigation concluded that imports of both metals pose a national security risk and subsequently the administration applied tariffs and quotas to both products. In a new investigation, the Commerce Department has started looking into whether imports of cars or automobile parts could impair U.S. national security. One just has to recall, you don’t typically take Ford Mustangs into war, and even if we took sedans into battle, we get most of ...

Long Horizon Uncovered Interest Parity, Updated

About twenty years ago, while visiting the Research Department of the IMF, Guy Meredith poked his head in my office and wondered aloud whether interest differentials could reliably predict (in the right direction) subsequent exchange rate changes at horizons of three to five years. The resulting paper led in turn to production of this graph: Figure 1: Panel beta coefficients at different horizons. Notes: up to 12 months, panel estimates for 6 currencies against US$, euro deposit rates, 1980Q1-2000Q4; 3-year results are zero-coupon yields, 1976Q1-1999Q2; 5 and 10 years, constant yields to maturity, 1980Q1-2000Q4 and 1983Q1-2000Q4 (last observation corresponds to exchange rate data). Source: Chinn (2006). The Fama regression is:(1)     st+k – st = α + β(itk-itk*) + εt+k Where s is the log ex...

Guest Contribution: “Exchange rate forecasting on a napkin”

Today we are fortunate to present a guest post written by Michele Ca’ Zorzi (ECB) and Michal Rubaszek (SGH Warsaw School of Economics). The views expressed are those of the authors and do not necessarily reflect those of the ECB. We have just released a new ECB Working Paper entitled “Exchange rate forecasting on a napkin”. The title highlights our desire to go back to basics on the topic of exchange rate forecasting, after a work-intensive attempt to beat the random walk (RW) with sophisticated structural models (“Exchange rate forecasting with DSGE models,”). Cheung et al. (2017) have recently reaffirmed the difficulties of finding models that consistently outperform the RW; however they also concluded that the Purchasing Power Parity (PPP) model performs fairly well. The starting point ...

Tales from the Midwest (Macro Spring Meetings, That Is)

Program here. Here are a couple of papers I found of interest. From the Empirical Macro session: “Output response to government spending: Evidence from new international military spending data,” By Viacheslav Sheremirov; Federal Reserve Bank of Boston, Sandra Spirovska; University of Wisconsin, Madison Using 25 years of military spending data from more than a hundred countries, this paper provides new evidence on the effect of government spending on output. Following a popular assumption that military spending is unlikely to respond to output at business-cycle frequencies—and exploiting variation in military spending of a significantly larger magnitude than in the previous literature based on U.S. data—we find that the pooled government spending multiplier is small: below 0.2. This estimat...

If ZTE Sanctions Are Up For Grabs, What about Additional Section 301 Sanctions?

Economic policy uncertainty as measured by the Baker, Bloom and Davis index is elevated (again) due to trade policy. Figure 1: US Economic Policy Uncertainty index (blue) and centered 7-day moving average (bold red). Source: policyuncertainty.com accessed 14 May 2018, and author’s calculations. Does this uncertainty matter? This article addressing just the Section 232 sanctions suggests the answer is “yes” (I must admit it’s kind of funny as an economist to try to convince people that uncertainty matters for investment and planning purposes — I thought it was a no-brainer). As a social scientist, I am curious to see what happens if additional Section 301 sanctions are placed on another $100 billion of Chinese exports to the United States. And to then see the effects as Mr. Trump wavers and...

Mr. Trump’s Faux National Security-based Trade Policy (aka ZTE – WTF?)

or, Mr. Trump is a wimp President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done! — Donald J. Trump (@realDonaldTrump) May 13, 2018 Mr. Trump was the first in decades to actually implement Section 232 trade sanctions based on alleged national security concerns. These sanctions hit our allies much harder than the Chinese that Mr. Trump asserts has damaged our interests. And yet, when sanctions based on real national security concerns actually threaten to substantively punish a Chinese firm, he flinches. Why do we need a process (CFIUS, Section 232) if Mr. Trump is just going to rip up the decisions? Thus far, the trade policies Mr. ...

Guest Contribution: “The ECB’s Strong Euro Problem”

Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments.Guest The euro has appreciated 10 percent against the Swiss franc (CHF) over the past year. The U.S. dollar and the Japanese yen have not made similar gains vis-à-vis the franc. Tracking the franc’s movements relative to the major currencies gives an unusual window onto the deflation-fighting credentials of the world’s major central banks. It illustrates, in particular, the European Central Bank’s half-hearted efforts to fight the risk of price deflation. Financial markets have come to believe...

Guest Contribution: “The European Central Bank’s Lack of Accountability Has Consequences”

Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments. The European Central Bank (ECB) was set up as the most independent of all central banks. Its independence also made it unaccountable. Freed from public accountability, the ECB’s decisions have been swayed by its management’s ideological preferences and by national interests. The consequence is that some eurozone countries are now subject to long-term deflation risk and are locked into a currency that is too strong for their economies. In 1991, when European negotiators met in Maastricht to de...

Comparative Performance of the UK Economy

There was no recession after Brexit. But a slowdown looks like it’s here now… Figure 1: Log real GDP for France (blue), UK (bold red), Germany (green), US (bold black), and euro area (teal), all normalized to 2016Q2. Source: OECD, BEA, author’s calculations. Notice that the UK has continued to grow (except with an essential stall in 2018Q1), but output has lagged other major economies. (Another depiction, comparing to G7 countries, is provided by Laurent Ferrara.) UK GDP growth has lagged its neighbors, even with a depreciated currency. Note however that the Baker, Bloom and Davis index of economic policy uncertainty remains elevated relative to the pre-Brexit average. Figure 2: Graph 1, Quarter on quarter SAAR growth rate of real UK GDP; Graph 2, Log real trade weighted UK pound, 2010=0; ...

Ready, Shoot, Aim: In the Foot Edition

In this post I showed the negative impact on some US allies from tariffs on Chinese exports to the US, highlighting the importance of distinguishing between gross value and value added. Here is another graphical depiction of how tariffs on US imports into the US are — in part — tariffs on US value added… Source: Economist Intelligence Unit. Note that the US value added is estimated at $50-$100 billion, so the midpoint of that range is only about 5% of total Chinese manufacturing exports gross value. Still, I’d hate to be a firm on the side of exporting components etc. to China to be incorporated into Chinese exports. Moreover, the hits to other allies (at least they are for now) like Japan, Korea and Australia, are significant in proportional terms.