Sustainability of the current account of the USA and Brazil and the role of the difference between the rates of return on assets and external liabilities

Authors

  • Renato Martins Godinho Fundação Getúlio Vargas. Escola de Economia de São Paulo.
  • Emerson Fernandes Marçal Fundação Getúlio Vargas. Escola de Economia de São Paulo. Centro de Macroeconomia Aplicada.
  • Diogo de Prince Mendonça Universiddade Federal de São Paulo. Escola Paulista de Política, Economia e Negócios.

DOI:

https://doi.org/10.11606/1980-5330/ea172350

Keywords:

trade balance, net foreign assets, sustainability of external accounts

Abstract

This paper analyses the behavior of the external accounts of the United States and Brazil from1970 to 2017, aiming to understand if the trajectory of the current account of the country is sustainable on a long-term basis. There is evidence of explosive behavior by US foreign assets and liabilities. If the country’s assets abroad continue to have a higher rate of return than the rate that remunerates its foreign liabilities, the country will be able to continue with a deficit in the trade balance while remaining solvent. As for Brazil, the evidence shows external solvency.

Downloads

Download data is not yet available.

Author Biographies

  • Renato Martins Godinho, Fundação Getúlio Vargas. Escola de Economia de São Paulo.

    Mestre em Economia, Escola de Economia de São Paulo (EESP), Fundação Getúlio Vargas (FGV).

  • Emerson Fernandes Marçal, Fundação Getúlio Vargas. Escola de Economia de São Paulo. Centro de Macroeconomia Aplicada.

    Coordenador do Centro de Macroeconomia Aplicada (CEMAP), Escola de Economia de São Paulo (EESP), Fundação Getúlio Vargas (FGV).

  • Diogo de Prince Mendonça, Universiddade Federal de São Paulo. Escola Paulista de Política, Economia e Negócios.

    Pesquisador do Centro de Macroeconomia Aplicada (CEMAP). Professor da Escola Paulista de Política, Economia e Negócios (EPPEN), Universidade Federal de São Paulo (UNIFESP).

References

Afonso, A., Huart, F., Jalles, J. T. & Stanek, P. (2019). Assessing the sustainability of external imbalances in the European Union. The World Economy, Hoboken, v. 42, p. 320–348.

Bajo-Rubio, O., Díaz-Roldán, C. & Esteve, V. (2014). Sustainability of external imbalances in the OECD countries. Applied Economics, Abingdon, v. 46, p. 441–449.

Bohn, H. (2007). Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint? Journal of Monetary Economics, Amsterdam, v. 54, p. 1837–1847.

Breuer, J. B., McNown, R. & Wallace, M. (2002). Series-specific unit root tests with panel data. Oxford Bulletin of Economics and Statistics, Oxford, v. 64, p. 527–546.

Caspi, I. (2017). Rtadf: testing for bubbles with EViews. Journal of Statistical Software, Innsbruck, v. 81, p. 1–16.

Chen, S.-W. (2011). Current account deficits and sustainability: evidence from the OECD countries. Economic Modelling, Amsterdam, v. 28, p. 1455–1464.

Cheng, X. & Phillips, P. C. (2009). Semiparametric cointegrating rank selection. The Econometrics Journal, Hoboken, v. 12, p. S83–S104.

Curcuru, S. E., Dvorak, T. & Warnock, F. E. (2008). Cross-border returns differentials. The Quarterly Journal of Economics, Cambridge, v. 123, p. 1495–1530.

Donoso, V. & Martin, V. (2014). Current account sustainability in Latin America. The Journal of International Trade & Economic Development, Abingdon, v. 23, p. 735–753.

Durdu, C. B., Mendoza, E. G. & Terrones, M. E. (2013). On the solvency of nations: cross-country evidence on the dynamics of external adjustment. Journal of International Money and Finance, Amsterdam, v. 32, p. 762–780.

Engel, C. (2020). Safe US assets and US capital flows. Journal of International Money and Finance, Amsterdam, v. 102, p. 102102.

Garg, B. & Prabheesh, K. (2020). Testing the intertemporal sustainability of current account in the presence of endogenous structural breaks: evidence from the top deficit countries. Economic Modelling, Amsterdam, v. 97, p. 365-379.

Gourinchas, P. & Rey, H. (2007a). From world banker to world venture capitalist: US external adjustment and the exorbitant privilege. In: Clarida, R. H. (org.) G7 Current Account Imbalances: Sustainability and Adjustment. Chicago: University of Chicago Press. p. 11–66.

Gourinchas, P. & Rey, H. (2007b). International financial adjustment. Journal of Political Economy, Chicago, v. 115, p. 665–703.

Gourinchas, P. & Rey, H. (2014). External adjustment, global imbalances, valuation effects. In: Rogoff, K.; Grossman, G. (orgs.) Handbook of International Economics. Amsterdam: Elsevier. v. 4, p. 585–645.

Gourinchas, P., Rey, H. & Sauzet, M. (2019). The international monetary and financial system. Annual Review of Economics, Palo Alto, v. 11, p. 859–893.

Hausmann, R. & Sturzenegger, F. (2007). The missing dark matter in the wealth of nations and its implications for global imbalances. Economic Policy, Oxford, p. 469–518.

Holmes, M. J. (2006). How sustainable are OECD current account balances in the long run? The Manchester School, Manchester, v. 74, p. 626–643.

Kindleberger, C. P., Salant, W. S. & Depres, E. (1966). The dollar and world liquidity: a minority view. The Economist, London, v. 6.

Lane, P. R. &Milesi-Ferretti, G.M. (2002). External wealth, the trade balance, and the real exchange rate. European Economic Review, Amsterdam, v. 46, p. 1049–1071.

Lane, P. R. & Milesi-Ferretti, G. M. (2007). The external wealth of nations mark II: revised and extended estimates of foreign assets and liabilities, 1970–2004. Journal of International Economics, Amsterdam, v. 73, p. 223–250.

Marçal, E. F., Prince, D., Merlin, G. T. & Zimmermann, B. (2017). Addressing econometric issues on how to construct theoretical based exchange rate misalignment estimates: searching for a comprehensive approach. In: 39º Encontro Brasileiro de Econometria. Natal: SBE.

Marcellino, M. (1999). Some consequences of temporal aggregation in empirical analysis. Journal of Business & Economic Statistics, Abingdon, v. 17, p. 129–136.

Monastiriotis, V. & Tunali, C. B. (2020). The sustainability of external imbalances in the European periphery. Open Economies Review, Heidelberg, v. 31, p. 273–294.

Nielsen, B. (2010). Analysis of coexplosive processes. Econometric Theory, Cambridge, v. 26, p. 882–915.

Phillips, P. C., Shi, S. & Yu, J. (2015). Testing for multiple bubbles: historical episodes of exuberance and collapse in the S&P 500. International Economic Review, Hoboken, v. 56, p. 1043–1078.

Phillips, P. C.,Wu, Y. & Yu, J. (2011). Explosive behavior in the 1990s Nasdaq: when did exuberance escalate asset values? International Economic Review, Hoboken, v. 52, p. 201–226.

Raybaudi, M., Sola, M. & Spagnolo, F. (2004). Red signals: current account deficits and sustainability. Economics Letters, Amsterdam, v. 84, p. 217–223.

Rogoff, K. S. & Tashiro, T. (2015). Japan’s exorbitant privilege. Journal of the Japanese and International Economies, Cambridge, v. 35, p. 43–61.

Schoder, C., Proaño, C. R. & Semmler, W. (2013). Are the current account imbalances between EMU countries sustainable? Evidence from parametric and non-parametric tests. Journal of Applied Econometrics, Kingston, v. 28, p. 1179–1204.

Vicard, V. (2019). The Exorbitant Privilege of High Tax Countries. Paris: CEPII Research Center.

Wright, T. & Zucman, G. (2018). The Exorbitant Tax Privilege. Cambridge: National Bureau of Economic Research.

Downloads

Published

2021-06-01

Issue

Vol. 25 No. 2 (2021)

Section

Papers

License

Copyright (c) 2021 Economia Aplicada

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

How to Cite

Godinho, R. M., Marçal, E. F., & Mendonça, D. de P. (2021). Sustainability of the current account of the USA and Brazil and the role of the difference between the rates of return on assets and external liabilities. Economia Aplicada, 25(2), 165-190. https://doi.org/10.11606/1980-5330/ea172350