Trade Balances in Germany and the United States: Demand Dominates Price

Transcription

1 Advanced Macroeconomics II: Term Paper Trade Balances in Germany and the United States: Demand Dominates Price Enno Schröder Department of Economics New School for Social Research March 22, 2011 This article investigates empirically the contribution of relative demand and relative prices to the observed trade balances in Germany and the United States from Germany developed a trade surplus because domestic demand slacked relative to trading partner s demand; the United States developed a trade deficit because domestic demand expanded faster than in the OECD. Factors determining relative prices, such as unit labor costs and the exchange rate, did not contribute significantly to the observed trade balances. 1. Introduction The latest edition of the IMF s World Economic Outlook warns that a strong, balanced, and sustained world recovery requires external rebalancing, with an increase in net exports in deficit countries and a decrease in net exports in surplus countries (IMF, 2010). If so, we should be alarmed, for the OECD observes that external rebalancing isn t happening: The global crisis has contributed to a temporary narrowing of global current account imbalances. Having reached over 5% of world GDP in 2008, the combined current account surpluses and deficits of the world s major countries and economic areas almost halved in These imbalances are beginning to widen again, with the notable exception of China s current account surplus, which has continued to fall in relation to GDP (OECD, 2010, p. 2). The following question arises naturally: What causes trade surpluses, what causes trade deficits? The causes vary across countries and across time, and so does the strength with 1

2 Figure 1: Germany and the United States: Two poles in the debate on global imbalances Balance on goods and services, % of GDP United States Germany 1990q1 1995q1 2000q1 2005q1 2010q1 which they operate. This article investigates the factors that gave rise to the trade surpluses in Germany and the deficits in the United States in the period The countries represent two poles in the debate on global imbalances. At one end, there is Germany, the Exportweltmeister and host of super-competitive manufacturing companies. At the other end, there are the United States, whose notorious trade deficits presumably factored into Obama s recent decision to rename the President s Economic Recovery Advisory Board into the President s Council on Jobs and Competitiveness. Figure 1 shows the development of the trade balance in Germany and the United States from 1991q1 to 2010q4. 1 In 1991, both countries trade account was roughly balanced. Germany s trade surplus took off around 2000, and the United States trade deficit increased rather steadily until the Great Recession hit. The figure confirms the OECD s observation: the narrowing of trade imbalances during the Great Recession is temporary. Those who interpret competitiveness as the ability to penetrate world markets presumably would prefer looking at a country s share in world exports, rather than looking at the trade balance. Figure 2 shows major countries exports in percent of the world total from 2000 to I m presenting this shortened time period because Germany s export market share took off in the year 2000, and the United States share declined sharply in the naughties. The figure shows that China s rise mirrors the decline of every G7 country but Germany. Germany gained export market share, a rise from 8% in 2000 to 9.1% in 2007, 1 The figures and later regressions in this article are based on data from the OECD Economic Outlook 88. Please consult the data appendix to learn about series codes and variable transformations. The EO88 was published in November 2010, and values for 2010 will be subject to revisions. 2

3 Figure 2: Major countries exports, % of world total, CHN USA DEU GBR FRA JPN ITA CAN while the United States share declined from 13.9% to 9.6% (table 1 presents the numbers). What caused the divergence? The United States trade deficit has triggered a debate on currency wars in which the Chinese-American exchange rate has assumed center stage. An undervalued renminbi is widely considered to have contributed to large Chinese current account surpluses in recent years and, correspondingly, to large US current account deficits (Cline, 2010, p. 1). The argument is simple: A falling dollar lowers the price of US exports and raises the price of US imports, and this should increase the world s demand for goods produced in the United States and decrease US demand for goods produced abroad. In the absence of exchange rates, the debate on Eurozone imbalances focused on unit labor costs, a measure of cost competitiveness. Unit labor costs are defined as ULC = Labor cost Productivity. (1) A country gains cost competitiveness when labor costs fall and when productivity rises, when the numerator falls and when the denominator rises. Germany experienced the largest gains in cost competitiveness and ran the largest trade surpluses in the Eurozone. Some researchers emphasize German wage restraint, others emphasize German productivity gains, while both camps share the view that rising competitiveness caused the German trade surplus. The former camp s typical claim reads like this: Germany has gained competitiveness within the eurozone for the sole reason that it has been able to squeeze its workers harder [than the rest of the Eurozone]. Inevitably it has generated persistent current account surpluses against the periphery (Lapavitsas et al., 2010, p. 2). de Nardis (2010) shifts attention from the numerator to the denominator of equation (1) he praises a German productivity boost: A virtuous phenomenon is at the origin of the German 3

4 Table 1: Trade statistics for the G7 and China CAN CHN DEU FRA GBR ITA JPN USA Trade balance, % of GDP: Trade volume, % of GDP: Exports, % of world total: Imports, % of world total:

5 trade surplus an extraordinary acceleration of productivity that allowed German firms and products to gain shares in world demand. 2 I do not attempt to gauge the relative contribution of wage restraint and productivity gains because I believe the unit labor costs are largely irrelevant to the recent development of Germany s trade balance. This article shifts the focus away from relative prices and towards demand. As Wyplosz (2010) observes: There is a link between [the Eurozone] deficits and surpluses and the pattern of relative labour costs. While this association might appear to support the view that relative competitiveness drives current account positions, it is possible that causality could run in the other direction or both observations might just reflect a common cause. For example, it may be that countries with relatively strong domestic demand undergo higher inflation and therefore competitiveness losses. Wyplosz mentions an indirect effect: strong demand triggers inflation which in turn may harm competitiveness. But strong demand worsens the trade balance directly, by fueling import demand. This article presents evidence that the relative strength of demand explains the development of the German and the US trade balance from 1991 to 2010, that changes in volume ruled over changes in the composition of expenditure, that income effects dominated substitution effects. 2. What we learn from past research The present analysis relates to the article by Arghyrou and Chortareas (2008). The authors set out to investigate the role of real exchange rates in current account determination in the EMU countries. Since unit labor costs deflate the underlying nominal exchange rates, inside the Eurozone real exchange rates measure nothing else but unit labor costs. The authors run a cointegration analysis with quarterly data from 1975 to 2005, and the magnitude of the coefficients in the cointegrating vector suggests that relative incomes have been playing a more prominent role than real exchange rates in long-run current account determination. This implies that the current account deterioration observed in countries such as Greece and Spain following the introduction of the euro is mainly due to higher than average growth rates (Arghyrou and Chortareas, 2008, p. 752). 3 2 Marin (2010) attempts to explain the root of the productivity gains: German firms offshored part of production to the new member states in Eastern Europe, Russia and Ukraine.... Relocating production to Eastern Europe made globally competing German firms leaner and more efficient helping them to win market shares in a growingly competitive world market. And she judges: This new way of organising production by slicing up the value chain has been more important for Germany s lower unit labour costs than German workers wage restraint. 3 The European Commission subscribes to the verdict: A large part of the cross-country divergence in the current account since the late 1990s is rooted in domestic demand factors.... Stronger relative demand pressures in a given Member State tend to fuel import demand and depress the current account.... Differences in export performance and therefore price competitiveness also contributed to the divergence of current accounts but, in most Member States, this was of second order compared with domestic demand factors (EC, 2010, p. 10). 5

6 Another related strand of empirical literature examines exogenous medium-term structural factors that drive current account balances. 4 The papers use panel data covering industrial and developing economies over the past 40 years, use five-year averages to minimize cyclical factors, and find a robust association between the current account and the following three variables: 5 The government s fiscal balance: Fiscal deficits are associated with current account deficits. The secular channel here is through financial markets. Higher fiscal balances (smaller deficits) reduce interest rates, putting downward pressure on the exchange rate and making imports more expensive and exports more competitive (Gagnon, 2011, p. 6). Besides the secular channel, there s the obvious channel: fiscal deficits inject demand. When government bodies or government employees purchase goods and services, import demand rises. The statistically significant relation, however, does not severely constrain the development of macroeconomic variables, as evidenced by Japan s large current account surpluses in combination with large fiscal deficits, or US current account deficits in combination with Clinton s fiscal surpluses. Net oil exports: Net oil exports are positively associated with current accounts. No explanation needed. Net international investment position: Assets and liabilities generate income flows in the form of interest and dividend payments; the net international investment position is therefore positively associated with the current account. Gagnon (2011, p. 6) explains a convention in this strand of literature: Statistical analysis is based on beginning-of-period assets to avoid the endogeneity that arises as current account balances cumulate into net foreign asset positions. This trick, however, does not eliminate the endogeneity problem; I object on the following grounds: A striking feature of the world s current account balances is their persistence, which means that yesterday s current account balance is correlated with both today s current account (due to persistence) and today s net investment position (due to the cumulation of balances). The correlation is quite strong, as figure 3 shows. 6 A simple cross-section regression illustrates the significance of the endogeneity problem. Let CAB 05 (CAB 00 ) denote the average current account balance over ( ), and NF A Dec02 the net international investment position on December 31, 2002, both expressed as percentage of GDP. The studies cited in footnote 4 regress CAB 05 on NF A Dec02 and other explanatory variables surely the coefficient on the net investment position picks up correlation between yesterday s and today s current account balance 4 Chinn and Prasad (2003); Chinn and Ito (2008); Gruber and Kamin (2007, 2009); Cheung et al. (2010); Gagnon (2011). 5 The significance of a host of other variables depends on the underlying sample and time period (e.g. GDP per capita, GDP growth, dependency ratio, financial market depth, capital controls). 6 I merged the OECD Economic Outlook with the updated and extended version of the dataset constructed by Lane and Milesi-Ferretti (2007), and ended up with the 33 OECD countries shown in figure 3. This is not an attempt to create a comprehensive sample; I merely want to illustrate that using beginning-ofperiod values doesn t eliminate the endogeneity problem. 6

7 Figure 3: Why endogeneity remains a problem Current account in % of GDP, average HUN SVKGRC PRT ISL NLD SWE DEU DNKJPN BEL ISR AUT CHL CAN KOR FRA MEXSVN IRL ITA POL GBR TUR CZE AUSA NZL ESP FIN NOR CHE LUX Current account in % of GDP, average Net foreign assets in % of GDP, 31 Dec JPN BEL FRA DEU SVN GBR KOR CZE CAN AUT DNK ITA USAISR IRL SVK NLD SWE POL MEX ESP TUR CHL AUS GRC PRT HUN ISL NZL FIN NOR CHE LUX Current account in % of GDP, average Table 2: Alleged structure and actual persistence (1) (2) (3) (4) CAB 05 NF A Dec02 CAB 05 CAB 05 NF A Dec (6.62) (0.87) CAB (7.27) (6.97) Residuals from (2) (0.35) Constant (1.99) (-2.59) (-0.06) (0.93) Observations R t statistics in parentheses 7

8 Table 3: Estimates from Hooper et al. (2000, p. 8) (CAB 00 is an omitted variable correlated with NF A Dec02 ). Such a regression amounts to explaining the current account with the current account, hardly an exogenous structural factor. Table 2 reports the results from four regressions: 1) net foreign assets are highly significant and explain 59% of the variation in the current account; 2) net foreign assets at the end of 2002 are correlated with the average current account balance over ; the residuals from this regression represent net foreign assets free from correlation with the current account; 3) these residuals don t explain current accounts, the R 2 is zero; 4) net foreign assets are insignificant once we include a lagged dependent variable to account for the persistence of the current account. How to interpret these results? The cited studies attain R 2 s in the order of 50%, i.e. structural factors are supposed to account for roughly 50% of the cross-country variation in current account balances. In my small sample, the explained variation drops from 59% to zero once we account for persistence in the current account; there is less structure in current accounts than we are led to believe. 7 The present article also relates to the voluminous literature on trade elasticities. 8 The studies regress a country s imports on domestic income and import prices and regress a country s exports on foreign income and export prices: ln imports = constant + β 1 ln domestic income + β 2 ln relative price ln exports = constant + β 1 ln foreign income + β 2 ln relative price. An increase in domestic income raises demand for imports, and an increase in foreign income raises foreign demand for domestic exports. A rise in the relative price of imports 7 Most studies search for a particular kind of structure; namely, a structure that would arise if current accounts were determined by representative agents maximizing utility, trading consumption today for consumption tomorrow. The data has falsified the intertemporal approach to the current account (see Nason and Rogers (2006) and the references therein). One can speculate: the empirical literature could establish a few more stylized facts if it was freed from the guidance of a falsified theory. 8 The monograph by Marquez (2002) provides references. 8

9 reduces demand for imports, and a rise in the relative price of a country s export goods reduces demand for exports. These findings are robust; the magnitude of the coefficients, however, varies by country and time period. Table 3 summarizes estimations from one such study, displaying long-run trade elasticities for G7 countries. While recent studies tend to use more disaggregated price indices and account for changes in trading partners and the composition of trade, this article defies the trend: it blends import and export elasticities into one coefficient and uses aggregate data. The goal is to explain the aggregate trade balance. The equation ln exports imports = constant + β foreign income 1 ln domestic income + β 2 ln relative price dispenses with the need to experiment with deterministic time trends, for neither the trade balance nor relative income can be assumed to grow or shrink forever. 3. Demand dominates price, says the data Before sorting out the data, we ll do some accounting. World income equals world demand: Y = D. We consider a country vis-a-vis the rest of the world and divide world income and demand into a domestic and a foreign component: Y h + Y a = D h + D a, h for home and a for abroad. We can further split a country s demand into the fraction purchasing domestic output, ( 1 m h) D h, and the remainder purchasing foreign output, imports M = m h D h. For the record, world demand is ( D = 1 m h) D h + m h D h + (1 m a ) D a + m a D a, where m h D h represents the home country s imports and m a D a represents the home country s exports. The above parametrization permits writing a country s ratio of exports X to imports M as X M = ma m h Da D h. (2) Relative prices should affect the fraction of demand falling on domestic versus foreign output, i.e. variables such as exchange rates and unit labor costs feed into m h and m a. We could write m a /m h = f (relative prices). The ratio D a /D h I will call relative demand. The previous section claimed: the development of relative demand exercised the decisive influence on the trade balance in Germany and the US; relative prices were of secondary importance. In terms of equation (2), this would mean that m a /m h was largely stable and D a /D h drove X/M. In order to investigate the hypothesis, we need to define empirical counterparts to these variables. Relative demand RD is the log of demand in the OECD as a whole divided by the home country s demand: RD = log ( D OECD /D ). (3) 9

10 Table 4: Summary stats, 1970q1/1991q1 to 2010q2 Obs Mean SD Min Max United States: Trade balance Relative demand ULC Germany: Trade balance Relative demand ULC The domestic demand series comes in real terms (EO88 series code TDDV). The ratio D OECD /D has no meaningful interpretation it s not the inverse of the country s share in OECD demand, because the numerator s unit differs from the denominator s unit (e.g. constant dollar and constant Euro). If the units were comparable across countries, we could compute ( D OECD D ) /D, with no substantial difference to the subsequent analysis, for the direction of change would remain the same. 9 D OECD /D is expressed as an index, that is, the variable is scaled such that the value in 2005q1 equals 100, and then the log is applied. Why employ demand in the OECD as indicator of foreign demand? Arghyrou and Chortareas (2008) use GDP in the G7, perhaps too narrow, and other studies use world GDP, perhaps too broad, as Germany and the United States trade mainly with other OECD countries. 10 I define the trade balance T B as T B = log(x/m), where X represents exports and M imports in nominal terms (EO88 series codes XGS and MGS). From now on, the term trade balance refers to this variable. Table 4 provides summary statistics. Figure 4 plots the trade balance against relative demand in Germany and the United States from , using annual data to avoid clutter. In 1991, the trade account was roughly balanced in both countries, T B Germany s slack in domestic demand held back imports; the country moved from the bottom-left to the top-right, developing a 9 Suppose D increases: in addition to the denominator s increase, we d observe a decrease of the numerator, only to strengthen the direction of change. 10 Besides, the EO88 provides a host of other interesting variables for the OECD aggregate, useful for further research. For example, one could split the competitiveness indicator into its constituent parts the nominal effective exchange rate, labor costs, and productivity and then run VARs. 10

11 Figure 4: Trade balance and relative demand in Germany and the United States, United States Germany Trade balance Trade balance Relative demand Relative demand trade surplus. The vibrant US economy grew faster than the OECD, demanding imports; the United States moved from the top-right to the bottom-left, developing a trade deficit. Figure 5 offers an alternative perspective on the same phenomenon. The US trade balance tracks both the trend and cycle of relative demand; the association between the two variables holds, not only for the last two decades, but for the entire period from 1970 to At this point I offer the conjecture: The US trade deficit has little to do with China; if only US major trading partners, Europe and Japan, had grown faster, the United States s trade balance would look much better. I believe the previous figures convey the argument this paper set out to make; the next section presents econometric evidence nevertheless. 4. Estimating ARDL models for Germany and the United States I estimate the autoregressive distributed lag (ARDL) model T B t = α + p β i T B t i + i=1 q 1 j=0 γ j RD t j + q 2 k=0 δ k ULC t k + ɛ t, (4) where T B is the trade balance as previously defined, RD is relative demand, and ULC represents relative cost competitiveness in log form (the log of EO88 series code UL- CMDR). The OECD competitiveness indicator merges into a single number a country s labor cost, productivity, and nominal effective exchange rate. ARDL models partially overcome the spurious regression problem, the t-stats of the explanatory variables converge to the standard normal distribution irrespective of the vari- 11

12 Figure 5: Trade and relative demand in Germany and the United States, 1970q1-2010q4 Germany Trade balance Relative demand 1970q1 1980q1 1990q1 2000q1 2010q United States Relative demand Trade balance 1970q1 1980q1 1990q1 2000q1 2010q

13 ables order of integration (Hamilton, 1994, p. 561). 11 The point estimators of the coefficients on both explanatory and lagged dependent variables are consistent, again, irrespective of the variables order of integration. My goal is merely to estimate the long-run elasticities ᾱ = α/ (1 p i=1 β i), γ = q 1 j=0 γ j/ (1 p i=1 β i), and δ = q 2 k=0 δ k/ (1 p i=1 β i), sparing us unit root tests and lengthy cointegration analysis. US data runs from 1970q1 to 2010q2 and German data runs from 1991q1 to 2010q2. I estimate equation (4) for each country separately and let information criteria choose the lag structure. With eight as maximum lag, there are = 648 possible combinations of p, q 1, and q 2 all of which I estimate. Luckily, the Akaike and Bayesian information criteria suggest the same lag structure; columns one and four of table 5 report the specifications with the lowest AIC/BIC value. The literature treats both the current account and the exchange rate as endogenous variables; specifying model (4) without the contemporaneous ULC leads to another = 576 estimates. Again, the Akaike and Bayesian information criteria suggest the same lag structure, and columns two and five of table 5 report the results. As robustness test, columns three and six re-estimate the specifications underlying columns two and five, using only pre-crisis observations up to 2007q4. The interesting numbers are on the bottom of table 5. The table reports the p-value of Godfrey s test for autocorrelation relevant because the parameter s t-statistics converge to a standard normal distribution only in the absence of autocorrelation. None of the estimates suffers from autocorrelation. The last three lines contain the very goal of the analysis, the long-run elasticities: the sign remains the same across the estimates, and the magnitude doesn t change much. In both countries do the signs of the long-run elasticities conform to the expectation that a rise in demand in the OECD relative to demand at home improves the trade balance, and that an increase in ULC, indicating a loss of competitiveness, worsens the trade balance in the long-run. How does the trade balance react to changes in demand, and how does it react to changes in competitiveness? The long-run elasticities give an answer, and figure 6 provides further evidence. It plots the trade balance as predicted by the long-run elasticities in columns two and five, not on basis of actual values of the explanatory variables, but on basis of hypothetical values. I assume, first, that relative demand (RD) remains on the level of 1991q1 throughout the period 1991q1-2010q2: ˆ T B t = ᾱ + γ RD 1991q1 + δ ULC t. I assume, then, that competitiveness (ULC) remains on the level of 1991q1: ˆ T B t = ᾱ + γ RD t + δ ULC 1991q1. Doing so is tantamount to excluding the effect of demand and competitiveness respectively. Figure 6 demonstrates that the development of relative demand explains the trend 11 McCallum s simulations (2010) suggest the spurious regression problem is being caused by autocorrelation in the residuals, not by unit roots. Once we control for autocorrelation, we may draw inferences from the t-statistics of OLS regressions involving unit roots. 13

14 Table 5: Results from estimating ARDL models United States Germany (1) (2) (3) (4) (5) (6) TB t (32.92) (32.89) (32.30) (8.79) (9.11) (8.88) RD t (3.54) (3.58) (3.79) (9.36) (9.18) (7.58) t (0.05) (0.03) (-0.11) (-7.53) (-7.68) (-6.40) t (-2.76) (-2.79) (-2.78) ULC t (-2.33) (2.76) t (-2.31) (-2.09) (-2.97) (-1.06) (-0.93) Const (-3.05) (-3.02) (-2.90) (-2.50) (-1.55) (-1.21) N Godfrey AIC BIC LR const LR RD LR ULC t statistics in parentheses; variables and specifications defined in text 14

15 Figure 6: Actual trade balance along with hypothetical trade balances Germany Trade balance, actual and predicted actual trade balance excluding competitiveness effect excluding demand effect 1990q1 1995q1 2000q1 2005q1 2010q1 Trade balance, actual and predicted excluding comptetitiveness effect United States excluding demand effect actual trade balance 1990q1 1995q1 2000q1 2005q1 2010q1 15

16 of the trade balance in both countries. The USA would be running a trade surplus, and Germany s trade would be balanced, if relative demand had remained on the level of 1991q1. 5. Discussion and conclusion Two premises underlie the discussion on trade imbalances: i) relative prices, as determined by unit labor costs and exchange rates, drive competitiveness; and ii) competitiveness drives the trade balance. We can avoid discussing the meaning of competitiveness Paul Krugman (1994) denies the possibility of defining competitivess on the level of a nation state by restating the underlying premises and simply claim that relative prices drive the trade balance. From this vantage point do politicians propose measures to correct trade imbalances: the European periphery ought to reduce wages and China stop currency manipulation. As the evidence shows, the trade balance in Germany and the United States was driven by relative demand and, hence, policies that address the volume of demand should be more effective in correcting trade imbalances than policies that shift relative prices. US demand was fueled by debt, by Reagan s deficits, the IT and the housing bubble, which means that households are likely to continue deleveraging and business repair balance sheets. This process helps to correct the US trade imbalance. In the face of high unemployment, few would want to argue the US ought to adopt policies to dampen spending for the purpose of reversing the trade balance. The same can be said of Europe s deficit countries, equally facing high unemployment. Matters are different for Germany, and perhaps for other surplus countries too. 12 Germany has squeezed its workers for more than a decade, depressing household consumption. Low consumption translates into low imports. Substantial wage increases, even beyond productivity growth, would serve to revive domestic activity and increase household consumption and imports. The costs of wage increases appear to be low in terms of loosing export markets, given this article found no economically significant effect of the unit labor costs on the trade balance. Low public investment in the years preceeding the Great Recession leaves scope for expansion now, which would further boost domestic demand. Last but not least, Germany is able to play the locomotive role because the government s budget is relatively healthy See Kregel (2010) on Keynes ideas on how to design the international monetary system such that surplus countries take up the burden of adjustment. 13 The least budgetary hard-pressed countries do they exist? should make up for the contractionary efforts of countries like Ireland, Portugal and Greece. In this sense, there is room for coordination and Germany is among the countries that can afford to play the locomotive role (Wyplosz, 2010). 16

17 References Arghyrou, M. G. and G. Chortareas: 2008, Current Account Imbalances and Real Exchange Rates in the Euro Area. Review of International Economics 16(4), Cheung, C., D. Furceri, and E. Rusticelli: 2010, Structural and Cyclical Factors Behind Current-Account Balances. Technical Report 775, OECD Publishing. Chinn, M. D. and H. Ito: 2008, Global Current Account Imbalances: American Fiscal Policy versus East Asian Savings. Review of International Economics 16(3), Chinn, M. D. and E. S. Prasad: 2003, Medium-term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration. Journal of International Economics 59(1), Cline, W. R.: 2010, Renminbi Undervaluation, China s Surplus, and the US Trade Deficit. Policy Brief 10-20, Peterson Institute for International Economics. de Nardis, S.: 2010, German Imbalance and European Tensions. EC: 2010, Surveillance of Intra-Euro-Area Competitiveness and Imbalances, Vol. 1/2010 of European Economy. Brussels: European Commission, Directorate-General for Economic and Financial Affairs. Gagnon, J. E.: 2011, Current Account Imbalances Coming Back. Technical Report 11-1, Peterson Institute for International Economics. Gruber, J. and S. Kamin: 2009, Do Differences in Financial Development Explain the Global Pattern of Current Account Imbalances?. Review of International Economics 17(4), Gruber, J. W. and S. B. Kamin: 2007, Explaining the Global Pattern of Current Account Imbalances. Journal of International Money and Finance 26(4), Hamilton, J. D.: 1994, Time Series Analysis. Princeton University Press, 1st edition. Hooper, P., K. Johnson, and J. Marquez: 2000, Trade Elasticities for G-7 Countries. Technical Report 87, Department of Economics, Princeton University, Princeton, N.J. IMF: 2010, World Economic Outlook: Recovery, Risk, and Rebalancing. Washington, DC: International Monetary Fund. Kregel, J.: 2010, An Alternative Perspective on Global Imbalances and International Reserve Currencies. Technical report, Levy Institute. 17

18 Krugman, P.: 1994, Competitiveness: A Dangerous Obsession. Foreign Affairs 73(2), Lane, P. R. and G. M. Milesi-Ferretti: 2007, The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, Journal of International Economics 73(2), Lapavitsas, C., A. Kaltenbrunner, D. Lindo, J. Michell, J. P. Painceira, E. Pires, J. Powell, A. Stenfors, and N. Teles: 2010, Eurozone Crisis: Beggar Thyself and Thy Neighbour. Technical report, Research on Money and Finance. Marin, D.: 2010, Germany s Super Competitiveness. Marquez, J. R.: 2002, Estimating Trade Elasticities. Springer. McCallum, B. T.: 2010, Is the Spurious Regression Problem Spurious?. National Bureau of Economic Research Working Paper Series No Nason, J. M. and J. H. Rogers: 2006, The present-value model of the current account has been rejected: Round up the usual suspects. Journal of International Economics 68(1), OECD: 2010, Economic Outlook, Vol. 88. Paris: Organisation for Economic Co-operation and Development. Wyplosz, C.: 2010, Germany, Current Accounts, and Competitiveness. A. Data appendix: series codes and variable transformations All data is taken from, and the series codes refer to, the OECD Economic Outlook 88. Figure 1: Trade balance in % of GDP = (XGS MGS)/GDP 100. Figure 2: Exports, % of world total = XSHA. Figure 3: Current account, % of GDP = CBGDP R. Net foreign assets, % of GDP = NF A from Lane and Milesi-Ferretti (2007). Figure 4: Relative demand = log(t DDV OECD /T DDV ), where T DDV OECD /T DDV is expressed as an index (the value in 2005q1 is set to 100). Trade balance = log(xgs/mgs). Figure 5: Same as in figure 4. Figure 6: See section 4. 18