Joseph W. Gruber

Explaining the global pattern of current account imbalances

This paper assesses some of the explanations that have been put forward for the global pattern of current account imbalances that has emerged in recent years: in particular, the large U.S. current account deficit and the large surpluses of the Asian developing economies. Based on the approach developed by Chinn and Prasad (2003), we use data for 61 countries during 1982-2003 to estimate panel regression models for the ratio of the current account balance to GDP. We find that a model that includes as its explanatory variables the standard determinants of current accounts proposed in the literature-?per capita income, relative growth rates, the fiscal balance, demographic variables, and economic openness-?can account for neither the large U.S. deficit nor large Asian surpluses of the 1997-2003 period. However, when we include a variable representing financial crises, which might be expected to restrain domestic demand and boost the current account balance, the model explains much of developing Asia?s swing into surplus since 1997. Even so, the model cannot explain why the capital outflows associated with Asia?s current account surpluses were channeled primarily into the U.S. economy. Observers have pointed to strong growth performance and a favorable institutional environment as elements attracting foreign investment into the United States, and we found strong evidence that good performance in these areas significantly reduces the current account balance. While a model incorporating these factors still fails to predict the large U.S. current account deficit (and, in fact, predicts a slight surplus), it does predict a U.S. current account balance that is relatively weaker than the aggregate balance of developing Asia.

Do Differences in Financial Development Explain the Global Pattern of Current Account Imbalances

Building on the panel-regression approach of Chinn and Prasad (2003) and Gruber and Kamin (2007), we assess whether differences in financial development can explain the large developing-country surpluses or large US deficits. We find little evidence to support these hypotheses. We also assess whether differences in asset returns, an alternative measure of the attractiveness of financial assets, can explain the international pattern of capital flows. Lower bond yields have been generally associated with larger current account deficits in industrial countries. However, US bond yields have not been significantly lower than those in other industrial economies, suggesting that US financial assets have not been unusually attractive. We consider an alternative hypothesis that spending in the United States was uniquely responsive to lower costs of capital. However, we found this hypothesis also to be weak, as household saving rates have declined throughout the industrial economies.

Fiscal Positions and Government Bond Yields in OECD Countries

We examine the impact of fiscal positions, both the level of debt and the fiscal balance, on long-term government bond yields in the OECD. In order to control for the endogenity of fiscal positions to the business cycle we utilize forward projections of fiscal positions from the OECDs Economic Outlook. In a panel regression over the period from 1988 to 2007, we find a robust and significant effect of fiscal performance on long-term bond yields. Our estimates imply that the marginal effect of the projected deterioration of fiscal positions associated with the recent financial crisis is to add about 60 basis points to U.S. bond yields by 2015, with effects on other G7 bond yields generally being smaller.

Productivity Shocks, Habits, and the Current Account

Empirical work regarding Intertemporal Current Account (ICA) models has centered around two distinct testing methodologies, present value tests and a productivity shock approach as formulated in Glick and Rogoff (1995). In previous work, Gruber (2001), I have tested an ICA model that allows for habits in aggregate consumption via the present value method. This paper applies the alternative Glick and Rogoff style approach to testing the model. The benefits of doing such are an ability to separate country-specific from worldwide output changes, a distinction of considerable importance, as well as to impose restrictions on the relationship between investment and output, neither of which are possible in the present value framework. The results of the test are supportive of the existence of habits and coincide with the results of Gruber (2001). The degree of habit persistence implied by the model is estimated for the G-7 countries. The paper also proposes habit formation as a possible solution to an empirical puzzle identified in the original Glick and Rogoff paper.

Interest rates and the volatility and correlation of commodity prices

We purpose a novel explanation for the observed increase in the correlation of commodity prices over the past decade. In contrast to theories that rely on the increased influence of financial speculators, we show that price correlation can increase as a result of a decline in the interest rate. More generally, we examine the effect of interest rates on the volatility and correlation of commodity prices, theoretically through the framework of Deaton and Laroque (1992) and empirically via a panel GARCH model. In theory, we show that lower interest rates decrease the volatility of prices, as lower inventory costs promote the smoothing of transient shocks, and can increase price correlation if common shocks are more persistent than idiosyncratic shocks. Empirically, as predicted by theory, we find that price volatility attributable to transitory shocks declines with interest rates, while, for many commodity pairs, price correlation increases as interest rates decline.

Where are Global and U.S. Trade Heading in the Aftermath of the Trade Collapse: Issues and Alternative Scenarios

Global and U.S. trade declined dramatically in the wake of the global financial crisis in late 2008 and early 2009. The subsequent recovery in trade, while vigorous at first, gradually lost momentum in 2010. Against this backdrop, this paper explores the prospects for global and U.S. trade in the medium term. We develop a unified empirical framework – an error correction model – that exploits the cointegrating relationship between trade and economic activity. The model allows us to juxtapose several scenarios with different assumptions about the strength of GDP growth going forward and the relationship between trade and economic activity. Our analysis suggests that during the crisis both world trade and U.S. exports declined significantly more than would have been expected on the basis of historical relationships with economic activity. Moreover, this gap between actual and equilibrium trade is closing only slowly and could persist for some time to come.

The Dollar in the U.S. International Transactions (USIT) Model

The dollars 20 percent climb against a broad index of foreign currencies since the middle of 2014 has led to an increased focus on how dollar fluctuations affect the U.S. economy. This note provides further detail on the structure and estimation of the trade block of the USIT model. In the context of the model, we present the estimated effect of a 10 percent dollar appreciation on U.S. trade flows and trade prices. We conclude with an assessment of the models performance since the dollar began its steep appreciation in the summer of 2014.

Productivity Growth and Phillips Curve in Canada

This study examines the impact of productivity growth on the relationship between inflation and unemployment in Canada. Recently it has been suggested that higher productivity growth is responsible for a shift in the U.S. Phillips curve that occurred in the late 1990s. This paper examines whether the Phillips curve in Canada shifted in a manner similar to that of the United States, and the degree to which higher productivity growth explains this shift.

Corporate Buybacks and Capital Investment : An International Perspective

In recent years, a great deal of attention has been paid in the United States to the simultaneous occurrence of relatively weak corporate capital investment (especially at this point in the business cycle) and historically elevated net share buybacks. Much of this commentary bemoans the fact that corporations are returning resources to shareholders instead of using them to boost capital investment, economic growth, and jobs.

Do Low Interest Rates Decrease Commodity Price Volatility

Commodity prices have been volatile over the past decade relative to the 1990s. Over the same period interest rates have also been relatively low, suggesting a possible connection.