Working Papers

2006 05

Australian Investment Aboard and the Current Account

An article in the most recent RBA Bulletin discusses the implications of a trend we have highlighted on this blog many times before: the growing stock of Australian investment abroad, particularly direct investment capital.  Australia’s stock of foreign assets is growing faster than its stock of foreign liabilities.  As the article notes:

Australia’s external assets are relatively skewed towards equities while liabilities are more skewed towards debt. As such, the valuation gains on assets in absolute terms on average exceed those on liabilities. One corollary of this is that the official measure of the current account deficit probably overstates the true ‘economic’ deficit, since the valuation gains are part of the overall return on foreign assets, but are not measured in the current account which includes only income flows…

In Australia’s case, if we were to treat the net valuation gains on foreign assets as all being part of the ‘income’ from these investments and include them in the current account, the current account deficit would have been on average about 0.3 percentage points of GDP per year lower than was actually recorded over the 15-year period.

The article also examines the implications of hedging for the change in Australia’s net foreign liabilities as a result of an exchange rate depreciation.  The results make a nonsense of Nouriel Roubini’s recent forecast of a currency and financial crisis in the dollar bloc periphery.

posted on 01 May 2006 by skirchner in Economics

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Entertainment This Week

A Colombia GSB student, with a striking resemblance to Glenn Hubbard, sending-up Hubbard’s supposed tilt at the Fed Chairmanship, to the tune of ‘Every Breath You Take.’

(via John Mauldin)

And coming soon to a cinema near you, Brad Pitt and Angelina Jolie as John Galt and Dagny Taggart.

posted on 29 April 2006 by skirchner in Culture & Society

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Brad DeLong: Too Sexy for His Dressing Gown

Never mind bloggers in pyjamas, here Brad DeLong discusses the ‘mystery’ of US capital account dynamics - in his dressing gown!

When you have recovered from seeing Brad in his bath robe, see Pamela Anderson as you have never seen her before…on the Wall Street Journal op-ed page.

posted on 28 April 2006 by skirchner in Economics

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The IMF & Global Imbalances

The WSJ editorialises on the IMF’s on-going fight against its own redundancy in a world of floating exchange rates and international capital mobility:

These are grim times at the International Monetary Fund; the world economy is too good. Global GDP has expanded by nearly 5% over the past three years, capital and trade are reaching far corners of the earth, and millions of the world’s poor are being lifted out of poverty. So naturally the IMF is worried.

That’s the backdrop of the weekend agreement in which the world’s developed nations agreed to give the Fund the task of lobbying to correct “global imbalances.” The idea is that the world’s trade and capital flows are out of whack, and are thus a grave threat to all of this prosperity. What the world needs now, said IMF Managing Director Rodrigo Rato, is “coordinated action” to unwind these “imbalances.” And who better to lead it but the Fund, through “multilateral surveillance” of problem countries.

There are few things more dangerous than a global bureaucracy looking to fix something that isn’t broken. Trade and capital flows are a function of millions of private decisions, so it’s far from clear that “imbalances” need addressing. Yes, the U.S. is importing huge amounts of capital and traded goods. But this is in part because the U.S. economy is growing so well, while Europe’s big three—Germany, France and Italy—are dead in the water. If Mr. Rato wants to roll a boulder up a hill, how about lobbying those countries to shape up?

posted on 27 April 2006 by skirchner in Economics

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While I Was Away

I have only recently returned from a few weeks in Europe.  Thanks to all those who made it such an enjoyable trip.  It was good to meet with some IE readers for the first time and to get some great first-hand insights into the UK and European economies.  There was considerable interest in Australia’s experience with the housing cycle and other developments in the dollar bloc periphery.

While I was away, Treasurer Costello used the Hendy-Warburton report to remind us how wonderful the Australian taxation system is in comparison with the rest of the OECD.  Having just visited some of the other OECD countries in question, I’m even more unmoved than usual by such lame comparisons. 

The Treasurer’s accompanying press release noted that “The Report will stand as a significant reference point to assist in framing policy to improve taxation policy.”  Yet the press release does not explicitly identify a single area in which Australian tax policy might actually be lacking.

posted on 27 April 2006 by skirchner in Economics

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Blog Admin

There will be no posts over the next three weeks while I take a break.  Comments will be closed and new member/comment registrations queued for approval at a later date.  I will not be responding to email.

posted on 03 April 2006 by skirchner in Misc

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