The submission deadlines for several conferences that feature work in international macroeconomics are coming up:
Con Date Sub Date Name Location
5/27 – 5/30 1/31 Int’l Trade and Finance Association Richmond, VA, U.S.
5/28 – 5/30 1/31 Int’l Con on Macro Anal & Int’l Fin Rethymno, Crete, Greece
6/4 – 6/7 4/4 European Economics & Finance Soc Kracow, Poland
6/25 – 6/26 2/3 Spanish Ass of Int’l Econ & Finance Toledo, Spain
7/8 – 7/10 3/18 National Bureau of Econ Research Cambridge, MA, U.S.
The election of 2016 in the U.S. saw the popularity of campaigning against international trade, foreign investments and immigration. Under the Trump administration the U.S. has implemented policies that mark a retreat from the globalization that was engineered during the 1990s and 2000s. What role has the U.S. played in the integration of global markets, and what happens if we withdraw?
Anthony Elson’s new book, The United States in the World Economy: Making Sense of Globalization, provides a thorough description and analysis of the position of the U.S. in the world economy. Elson, a former IMF staff member, shows that the U.S. retains a predominant position in international economic transactions. But the foreign sector is not as important for our domestic economy as it is for many other countries, and as a result its contributions to the domestic economy are often overlooked.
In international trade, for example, the U.S. share of global merchandise exports and imports lags China’s very narrowly, 11.46% versus 11.86% in 2015. But trade openness (the sum of exports and imports as a share of GDP) in the U.S. was 28%, lower than China’s openness of 40% and significantly less than Germany’s 86%. This disparity may explain the lack of attention paid to exports, while imports are seen as a threat. (One exception has been the agricultural sector, where China’s cutback of its purchases of U.S. soybeans and other products has forced the Trump administration to make payments to farmers).
Trump has cut back existing institutional arrangements, exiting the Trans-Pacific Partnership (TPP) and renegotiating the North American Free Trade Agreement (NAFTA). (However, its successor, the United States, Mexico and Canada Agreement (USMCA), does not substantively change the basic provisions of the earlier pact.) The administration actively uses tariffs as a tool of policy, often with little justification, and these inflict damage on the global economy. The U.S. agreement with China halts the scheduled escalation in trade measures but leaves in place tariffs that disrupt the domestic economy, leaving great uncertainty about the timing of the next stage. Training programs that could facilitate the movement of workers across sectors, on the other hand, have been underutilized.
Elson also documents the dominance of the U.S. dollar in international finance. The dollar is the most widely traded currency in foreign exchange markets. Currencies linked to the dollar represent about 60% of world GDP, which is much larger than the euro’s usage. About two-thirds of foreign central bank reserves are denominated in dollars; similarly, about 60% of global corporate debt is denominated in dollars. U.S. Treasury debt is the world’s safe asset, which allows the U.S. to fund its fiscal deficits more cheaply. But global finance only becomes relevant for many Americans in the event of foreign travel or study.
The one form of capital inflows that has attracted the attention of the current administration is foreign direct investment. The Committee on Foreign Investment in the United States (CFIUS) is a governmental interagency committee that reviews investments in the U.S. that may have national security implications. CFIUS has become particularly interested in Chinese acquisitions of U.S. firms that may allow access to U.S.-developed technology, and has broadened its scope to include property acquisition. There is also some discussion on tightening the access of Chinese firms to U.S. financial markets.
Immigration, on the other hand, is an issue that arouses great public interest, and in many quarters, opposition. Elson reports that the U.S. has the largest number of immigrants—44 million—than any other country, and this group represents about one-fifth of the global immigrant population. But the migrants’ share of the total U.S. population of about 14% is less than that of many other nations. Canada’s migrants, for example, represent about 22% of its population, while Australia’s migrant share is 28%.
The consensus among economists who have studied the impact of immigrants on the U.S. economy is that migrant labor is a complement rather than a substitute for native workers. Any negative impact on domestic wages falls mainly on prior immigrants. While local communities bear the cost of increased services such as education, there are fiscal benefits at the federal level that come from taxes on migrant labor. Elson points out that in addition to the “immigration surplus” that accrues to the complementary workers and the firms that hire them, there are also long-run benefits arising from the positive impact of migrants’ entrepreneurship and innovations on economic activity.
But opposition to migration is a bedrock issue for the administration. Not only does it seek to curb illegal immigration through a border wall, but members of the administration want to revamp many of the provisions that govern legal migration. For example, family-related immigration may be reduced in favor of “merit-based immigration,“ which is related to education. There is also opposition to the “diversity lottery,” which in recent years has allowed African migrants to enter the country. All these measures are under consideration as the native-born working population ages and there is a need for new workers.
The U.S., therefore, remains a major power in the global economy, but this position is often not understood at home. The benefits are often hidden, while the costs (sometimes fabricated) are widely publicized. Politicians find taking xenophobic positions, particularly on immigration, an easy way to court electoral support.
It is inevitable that the relative position of the U.S. in the global economy will continue to erode as that of other economies, particularly China’s, rise. But historian Adam Tooze of Columbia University writes that the two pillars of American power, global and military, remain in place. The primary threat to this hegemonic position, therefore, comes not from abroad but from shifts in long-established norms and policies. The international order abhors a vacuum, and an American retreat will be met by active counter-moves.
It has been a decade since the global financial crisis effectively ended opposition to the use of capital controls. The IMF’s drive towards capital account deregulation had been blunted by the Asian financial crisis of 1997-98, but there was still a belief in some quarters that complete capital mobility was an appropriate long-run goal for emerging markets once their financial markets sufficiently matured. The meltdown in financial markets in advanced economies in 2008-09 ended that aspiration. Several recent papers have summarized subsequent research on the justification for capital controls and the evidence on their effectiveness.
Bilge Erten of Northeastern University, Anton Korinek of the University of Virginia and José Antonio Ocampo of Columbia University have a paper, “Capital Controls: Theory and Evidence,” that was prepared for the Journal of Economic Literature and summarizes recent work on this topic. In this literature, the micro-foundations for the use of capital controls to improve welfare are based on externalities that private agents do not internalize. The first type of externality is pecuniary, which can lead to a change in the value of collateral and a redistribution between agents. In such cases, private agents may borrow more than is optimal for society, which suffers the consequences in the event of a financial shock. Policymakers can restrict capital flows to limit financial fragility.
The second justification of capital controls is due to aggregate demand externalities, which are associated with unemployment. Private agents may borrow in international markets and fuel a domestic boom that leaves the domestic economy vulnerable to a downturn. If there are domestic frictions and constraints on the use of monetary policy that limit the response to an economic contraction, then capital controls may be useful in mitigating the downturn.
Alessandro Rebucci of Johns Hopkins and Chang Ma of Fudan University also summarize this literature in “Capital Controls: A Survey of the New Literature,” prepared for the Oxford Research Encyclopedia of Economics and Finance. They discuss the use capital controls in the case of both pecuniary and demand externalities, and capital controls in the context of the trilemma. In their review of the empirical literature on capital controls, they summarize two lines of research. The first deals with the actual use of capital controls, and the second their relative effectiveness.
Whether or not capital controls are used as a countercyclical instrument together with other macroprudential tools has been an issue of dispute. Rebucci and Ma report there is recent evidence that indicates that such instruments have been utilized in this manner, as the recent theoretical literature proposes. There are also cross-country studies of capital control effectiveness that are consistent with the theoretical justification for the use of such measures. For example, capital controls can limit financial vulnerability by shifting the composition of a country’s external balance sheet away from debt.
Some recent papers from the IMF investigate the actual use of capital controls and other policy tools in emerging market economies. Atish R. Ghosh, Jonathan D. Ostry and Mahvash S. Qureshi of the IMF investigated the response of emerging markets to capital flows in a 2017 working paper, “Managing the Tide: How Do Emerging Markets Respond to Capital Flows?” They report that policymakers in a sample of 51 countries over the period of 2005-13 used a number of instruments to deal with capital flows. In addition to foreign exchange market intervention and central bank policy rates, capital controls were utilized, particularly when the inflows took the form of portfolio and other flows. Tightening of capital inflow controls was more likely during periods of credit growth and real exchange rate appreciation. The authors’ finding that several major emerging markets have used capital controls to deal with risks to financial and macroeconomic stability is consistent with the theoretical literature cited above. However, the authors caution that their results do not indicate whether managing capital flows actually prevents or dampens instability.
This subject has been addressed by Gaston Gelos, Lucyna Gornicka, Robin Koepke, Ratna Sahay and Silvia Sgherri in their new IMF working paper, “Capital Flows at Risk: Taming the Ebbs and Flows.” They examine the policy responses to sharp portfolio flow movements in 35 emerging market and developing economies during the 1996-2018 period, using a rise in BBB-rated U.S. corporate bond yields as a global shock. The authors look at the structural characteristics and policy frameworks of the countries as well as their policy actions. Among their results they find that more open capital accounts at the time of the shock are associated with fewer large inflows after the shock. Moreover, a tightening of capital flow measures is linked to larger outflows in the short-run. They also find that monetary and macroprudential policies have limited effectiveness in shielding countries from the risks associated with global shocks.
Capital controls have become an important tool for many developing economies, and there are ample grounds to justify their implementation. Recent empirical literature seems to show that the actual implementation of such measures is undertaken in a manner that meets the criteria outlined in the theoretical literature. However, whether regulatory limits on capital mobility actually achieve their financial and macroeconomic goals is still not proven. The Federal Reserve has signaled its intention to maintain the Federal Funds Rate at its current level, but shocks can come from many sources. Policymakers may find themselves drawing upon all the tools available to them in the case of a new global disruption to capital flows.