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The Effect of External Positions on FX Misalignments: A study of the G10 countries applying the Macroeconomic Balance Approach

Heidmann, Sandra and Sangberg, Fredrik LU (2013) NEKP02 20131
Department of Economics
Abstract
The aim of this paper is to investigate if the macroeconomic balance approach will generate different misalignments whether net foreign assets or cumulative current account is applied. The dataset consist of the G10 countries and range from 1981 to 2011. The relevant determinants of the current account are found to be fiscal balance, population growth, net foreign assets, cumulative current account and trade integration. The cumulative current account is concluded to have a greater impact on the current account than net foreign assets, which in turn results in a larger misalignment when the cumulative current account is significantly high or low. It is impossible to conclude whether net foreign assets or the cumulative current account is a... (More)
The aim of this paper is to investigate if the macroeconomic balance approach will generate different misalignments whether net foreign assets or cumulative current account is applied. The dataset consist of the G10 countries and range from 1981 to 2011. The relevant determinants of the current account are found to be fiscal balance, population growth, net foreign assets, cumulative current account and trade integration. The cumulative current account is concluded to have a greater impact on the current account than net foreign assets, which in turn results in a larger misalignment when the cumulative current account is significantly high or low. It is impossible to conclude whether net foreign assets or the cumulative current account is a better proxy for the external position of a country. However, the cumulative current account does in some cases appear to provide results that seem more in line with reality using subjective judgment. Valuation effects could be seen as enhancing net foreign assets as a measure, but could also contribute to misleading implications of the state of an economy. (Less)
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author
Heidmann, Sandra and Sangberg, Fredrik LU
supervisor
organization
course
NEKP02 20131
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Foreign exchange rate assessment, macroeconomic balance approach, net foreign assets, cumulative current account
language
English
id
3879009
date added to LUP
2013-06-25 11:32:10
date last changed
2013-06-25 11:32:10
@misc{3879009,
  abstract     = {The aim of this paper is to investigate if the macroeconomic balance approach will generate different misalignments whether net foreign assets or cumulative current account is applied. The dataset consist of the G10 countries and range from 1981 to 2011. The relevant determinants of the current account are found to be fiscal balance, population growth, net foreign assets, cumulative current account and trade integration. The cumulative current account is concluded to have a greater impact on the current account than net foreign assets, which in turn results in a larger misalignment when the cumulative current account is significantly high or low. It is impossible to conclude whether net foreign assets or the cumulative current account is a better proxy for the external position of a country. However, the cumulative current account does in some cases appear to provide results that seem more in line with reality using subjective judgment. Valuation effects could be seen as enhancing net foreign assets as a measure, but could also contribute to misleading implications of the state of an economy.},
  author       = {Heidmann, Sandra and Sangberg, Fredrik},
  keyword      = {Foreign exchange rate assessment,macroeconomic balance approach,net foreign assets,cumulative current account},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Effect of External Positions on FX Misalignments: A study of the G10 countries applying the Macroeconomic Balance Approach},
  year         = {2013},
}