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"Over the past decade the United States has experienced widening current account deficits and a steady deterioration of its net foreign asset position. During the second half of the 1990s, this deterioration was fueled by foreign investment in a booming U.S. stock market. During the first half of the 2000s, this deterioration has been fuelled by foreign purchases of rapidly increasing U.S. government debt. A somewhat surprising aspect of the current debate is that stock market movements and fiscal policy choices have been largely treated as unrelated events. Stock market movements are usually interpreted as reflecting exogenous changes in perceived or real productivity, while budget deficits are usually understood as a mainly political decision. The authors challenge this view here and develop two alternative interpretations. Both are based on the notion that a bubble (the "dot-com" bubble) has been driving the stock market, but differ in their assumptions about the interactions between this bubble and fiscal policy (the "Bush" deficits). The "benevolent" view holds that a change in investor sentiment led to the collapse of the dot-com bubble and the Bush deficits were a welfare-improving policy response to this event. The "cynical" view holds instead that the Bush deficits led to the collapse of the dot-com bubble as the new administration tried to appropriate rents from foreign investors. The authors discuss the implications of each of these views for the future evolution of the U.S. economy and, in particular, its net foreign asset position. "--World Bank web site.

International Investment • Long-Term Capital Movements --- Current Account Adjustment • Short-Term Capital Movements --- Financial Aspects of Economic Integration --- Bush, George W. --- United States --- Economic policy

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This paper develops a model that focuses on the interaction of liquidity creation by financial intermediaries with capital flows and exchange rate collapses. The intermediaries’ role of transforming maturities is shown to result in larger movements of capital and a higher probability of crisis. These movements resemble the observed cycle in capital flows: large inflows, crisis and abrupt outflows. The model highlights how adverse productivity and international interest rate shocks may trigger a sudden outflow of capital and an exchange collapse. The initial shock is magnified by the behavior of individual foreign investors linked through their deposits in the intermediaries. The expectation of an eventual exchange rate crisis links investors’ behavior even further.

Exports and Imports --- Finance: General --- Foreign Exchange --- International Investment --- Long-term Capital Movements --- Portfolio Choice --- Investment Decisions --- International economics --- Currency --- Foreign exchange --- Finance --- Capital outflows --- Exchange rates --- Capital inflows --- Capital flows --- Liquidity --- Capital movements --- Economics --- United States

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Many studies have attempted to uncover empirical regularities in how countries choose their exchange rate regimes. We survey previous studies showing that, taken as a whole, the literature is inconclusive. Drawing on a large dataset with many potential explanatory variables and a variety of exchange rate regime classifications, we test old and new theories and confirm that no robust empirical regularities emerge.

Exports and Imports --- Foreign Exchange --- Inflation --- Price Level --- Deflation --- International Investment --- Long-term Capital Movements --- Currency --- Foreign exchange --- Macroeconomics --- International economics --- Exchange rate arrangements --- Conventional peg --- Capital controls --- Exchange rates --- Prices --- Balance of payments --- Capital movements --- United States

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Although Europe in the aggregate is a not a major contributor to global current account imbalances, its trade and financial linkages with the rest of the world mean that it will still be affected by a shift in the current configuration of external deficits and surpluses. We assess the macroeconomic impact on Europe of global current account adjustment under alternative scenarios, emphasizing both trade and financial channels. Finally, we consider heterogeneous exposure across individual European economies to external adjustment shocks.

Exports and Imports --- Current Account Adjustment --- Short-term Capital Movements --- International Investment --- Long-term Capital Movements --- International economics --- External position --- Current account balance --- Foreign assets --- Current account --- Current account deficits --- Balance of payments --- International finance --- Investments, Foreign --- United States

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Fund member countries that adopt market-friendly policies often encounter a credibility problem—market-friendly policies are not effective in stimulating private investment as long as there remains a significant risk of policy reversal. The root of this risk lies in the discretionary policy-making authority of governments. Committing to a program with the Fund, and endorsing its conditionality, is one instrument available to governments to overcome this difficulty. The paper develops this interpretation of conditionality and indicates some of its operational implications for Fund programs.

Money and Monetary Policy --- International Investment --- Long-term Capital Movements --- International Finance: General --- Fiscal Policies and Behavior of Economic Agents: General --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Monetary economics --- Credit ratings --- Money --- United States