Current Account and REER misalignments in Central Eastern EU Countries: an update using the Macroeconomic Balance approach 1

Transcription

1 Current Account and REER misalignments in Central Eastern EU Countries: an update using the Macroeconomic Balance approach 1 Mariarosaria Comunale Bank of Lithuania Bank of Lithuania 1 The conclusions expressed in this paper are those of the author and do not necessarily represent the o cial views of the Bank of Lithuania. The updated version here presented has been resubmitted to a journal in August The text is available on request, PLEASE DO NOT QUOTE WITHOUT AUTHOR S PERMISSION. Previous version (2015) available as BoL WP. Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

2 Motivation (1) Question Why is an assessment of REERs and CAs important in the new EU member states? The CA is composed by the trade balance (X-M), net primary income or factor income (earnings on foreign investments minus payments made to foreign investors) and net cash transfers (f.i. remittances). CA imbalances = important factor for emergence of bubbles and the transmission of nancial crisis internationally (Ca Zorzi et al, 2012) and can also signal elevated macroeconomic and nancial stresses (Obstfeld, 2012); High volatility in CA for CEECs (less for more mature economies); It is worth examining equilibrium CAs to assess the CA in a medium-run perspective. Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

3 Motivation (2) REER = provides an assessment of a country s external competitiveness and key role in external adjustment process in an integrated world (Lee et al, 2008); An increase in the REER means here a decrease in competitiveness. In the context of EMU is relevant to interpret the competitiveness di erentials across members having the same currency or in order to determine the appropriate entry rate. Here also REER as instrument to rebalance CA. Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

4 This paper Aim of the paper: Following the standard IMF CGER (+ version EBA-lite, 2016) > Macroeconomic Balance (MB) approach We conduct an assessment of the current account position rstly and than of price competitiveness (REERs) of the CEECs. It considers speci cally the CEECs as an overall group using data Equilibrium value of the CA = based on CA fundamentals (included exchange rate regimes, foreign capital ows and global factors); Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

5 This paper Aim of the paper: Following the standard IMF CGER (+ version EBA-lite, 2016) > Macroeconomic Balance (MB) approach We conduct an assessment of the current account position rstly and than of price competitiveness (REERs) of the CEECs. It considers speci cally the CEECs as an overall group using data Equilibrium value of the CA = based on CA fundamentals (included exchange rate regimes, foreign capital ows and global factors); Equilibrium value of the REER (FEER) = as the rate which closes the gap between equilibrium CA and the actual CA balance. Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

6 Main ndings The estimated coe cients are in line with the expectations and the literature (for ex. Bollano and Ibrahimaj (2015) and Ajevskis et al. (2015) for LV); Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

7 Main ndings The estimated coe cients are in line with the expectations and the literature (for ex. Bollano and Ibrahimaj (2015) and Ajevskis et al. (2015) for LV); The foreign capital ows, scal balance and relative output growth seem to play a crucial role in explaining the current account balance; Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

8 Main ndings The estimated coe cients are in line with the expectations and the literature (for ex. Bollano and Ibrahimaj (2015) and Ajevskis et al. (2015) for LV); The foreign capital ows, scal balance and relative output growth seem to play a crucial role in explaining the current account balance; Foreign variables may matter (role of spillovers); Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

9 Main ndings The estimated coe cients are in line with the expectations and the literature (for ex. Bollano and Ibrahimaj (2015) and Ajevskis et al. (2015) for LV); The foreign capital ows, scal balance and relative output growth seem to play a crucial role in explaining the current account balance; Foreign variables may matter (role of spillovers); The real e ective exchange rate gaps cyclical: loss competitivess in now close to equilibrium; Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

10 Main ndings The estimated coe cients are in line with the expectations and the literature (for ex. Bollano and Ibrahimaj (2015) and Ajevskis et al. (2015) for LV); The foreign capital ows, scal balance and relative output growth seem to play a crucial role in explaining the current account balance; Foreign variables may matter (role of spillovers); The real e ective exchange rate gaps cyclical: loss competitivess in now close to equilibrium; Overall the countries have moved closer to their CA equilibria since Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

11 Results (1) : baseline with FE and POLS (corrected for CSD) Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

12 Results (2) : Actual CA balance vs. CA norm Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

13 Results (3) : Actual REER vs. REER norm Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

14 Results (4a) : Factor analysis Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

15 Results (4b) : Factor analysis (cont.) Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

16 Results (5) : CA dynamics and global factors Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

17 Conclusions and policy implications (1) Main factors to contribute to CA in boom, bust and recover are FDIs, GDP growth and scal policies (the latter only in post-crisis time); Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

18 Conclusions and policy implications (1) Main factors to contribute to CA in boom, bust and recover are FDIs, GDP growth and scal policies (the latter only in post-crisis time); Foreign variables may matter (role of spillovers); Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

19 Conclusions and policy implications (1) Main factors to contribute to CA in boom, bust and recover are FDIs, GDP growth and scal policies (the latter only in post-crisis time); Foreign variables may matter (role of spillovers); The real e ective exchange rate gaps cyclical: loss competitivess in now close to equilibrium; Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

20 Conclusions and policy implications (1) Main factors to contribute to CA in boom, bust and recover are FDIs, GDP growth and scal policies (the latter only in post-crisis time); Foreign variables may matter (role of spillovers); The real e ective exchange rate gaps cyclical: loss competitivess in now close to equilibrium; Overall the countries have moved closer to their CA equilibria since > in 2016 almost in line. Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

21 Conclusions and policy implications (2) The main policy implication involves the future behaviour. What factors/determinants of CA should we monitor? Are the REER and its components the right instruments or/and may be the role of other variables (see the nancial cycle) as important? Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

22 Thank you for your attention! to: Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

23 Motivation (2) Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

24 Methodology: empirical methodology 1) Estimating the coe cients βs of fundamentals (X ) of the CA: CA i,t = β 0 i X i,t + γ i dummy i,t + ε i,t Following the literature, the X are: the relative scal balance, the relative old-age dependency ratio and the relative population growth, the initial NFA, the oil balance, a relative income measure (GDP per capita PPP over US), the relative real GDP per capita growth and the net FDI ows/gdp (Medina et al., 2010). dummy: 1) for the crisis/post-crisis period ; 2) for the pegged regimes (time-varying). Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

25 Methodology: empirical methodology 2) Computing the CA norm (=equilibrium value for CA) we need the X T +H values = values of the fundamentals 6 years ahead (for 2016 is 2022 and so backwards) including the variables in relative terms. CAnorm i,t = bβ 0 i X T +H 3) We have the CA misalignments as CA norm - CA based on projected values from IMF WEO (H=6years) - CGER Or as in EBA-lite (2016) > comparison wrt actual CA balance at time t CAmis i,t = CAnorm i,t CA i,t Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

26 Methodology: empirical methodology 4) Then, in order to have the REER misalignments we need a measure of CA elasticity ε CA. ε CA,i,t = [ε X,i,t ( X GDP ) i,t] [(ε M,i,t 1) ( M GDP ) i,t] where ε X and are ε M the elasticities respectively of exports X and imports M (vis-á-vis the rest of the world) to the REER. These values are estimated on the same countries/periods by using an ECM and are time-varying and country speci c (NEW!) 5) Ultimately, the REER misalignments are given as the ratio of CA gap and the elasticity of CA. The equilibrium REER (called FEER) will be simply the actual REER minus the REER misalignments. REERmis i,t = CAmis i,t ε CA,i,t FEER i,t = REER i,t REERmis i,t REERmis i,t = REER i,t FEER i,t Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

27 With/without FDIs: CA Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

28 Results (2a) : Actual CA balance vs. CA norm Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

29 Results (2b) : CA misalignments with FDIs Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

30 Results (3a) : Actual REER vs. REER norm Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23

31 Results (3b) : REER misalignments with FDIs Mariarosaria Comunale (Bank of Lithuania) REERs IN CEECs 15/09/ / 23