Ali Al-Eyd

Consumer confidence indices and short-term forecasting of consumption

There is growing interest in examining the short-term link between survey-based confidence indicators and real economic activity. This paper builds on previous studies to establish whether there is a short-term predictive relationship between measures of consumer confidence and actual consumption, in a range of major industrial countries. It then extends such previous analyses by assessing whether this relation has changed over time, and whether we can attribute any time-varying relation to structural developments in the economy, such as financial deepening and the increasing role of house prices in determination of consumption.

Correcting US Imbalances

The US current account deficit is in excess of 6 per cent of GDP, and is leading to an accumulation of debts. We use NiGEM to evaluate the causes of the decline, and suggest that domestic absorption in the US has increased markedly. Nominal realignments and monetary expansions elsewhere are shown to be only short term palliatives. A sustained change in the current account must come either from a real realignment associated with a rise in risk premia on US assets or from a change in domestic absorption in the US and elsewhere. Any adjustment must be associated with a significant change in eth US real exchange rate to induce expenditure switching as well.

Dollars and Deficits - The US Current Account Deficit and its Exchange Rate Consequences

In the past three years the US dollar has been declining whilst the US current account deficit has expanded, and these two developments are clearly linked. However, the causes of the decline in the dollar and the solution to the US deficit may not be as closely related as at first may appear. The emergence of a sustained deficit does not automatically necessitate a fall in the exchange rate, and a fall in the exchange rate may not correct such a deficit. Deficits can exist if the currency moves above its sustainable real exchange rate, and a real depreciation can remove such a deficit. Deficits caused by exchange rate movements are likely to be more temporary than those that either emerge for long-term structural reasons or result from structural imbalances in the economy. A structural deficit can be the consequence of low domestic saving or high domestic government borrowing. If domestic investment is very profitable then even high levels of domestic saving may still result in a savings shortfall, and the high returns may induce a structural capital inflow which will produce a sustainable current account deficit as a consequence. All these factors have influenced the increase in the US deficit in the past decade, and it is difficult to see how a correction to the deficit can occur without one of the domestic drivers changing in some way. Here we present a set of simulations using NiGEM to examine the impacts of alternative adjustment scenarios and their global implications. Before adding to the debate about the possible remedies, we will attempt to establish the sources of the current conjuncture, as the alternative adjustment paths for deficits and for the dollar depend on the sources of misalignment.

A Portfolio-Based Analysis of Movements in the Euro-Dollar Rate

Since its inception on 1 January 1999, the euro, as measured against the US dollar, has experienced a period of sustained weakness followed by a period of sustained strength. After weakening slightly since the beginning of 2005, the euro is currently hovering around its initial value. Conventional models of exchange-rate behaviour (see Isard, 1995) rely on underlying economic fundamentals to explain exchange-rate paths. However, as De Grauwe (2000) discusses, these models do not provide clear guidance for an analysis of the factors driving the fluctuations in the euro, as speculative market activity or other noise can dominate the role of fundamentals in the short term. The movements of the euro/dollar exchange rate are not easily explained, as it is difficult to disentangle the roles of economic fundamentals and ‘news’ from ‘pure noise’ (a random walk).