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The Role of Savings and Investment in Current Account Determination: The Case of the Federal Republic of Germany (1973 - 1979)

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  4. Vol. 16, Issue 3
  5. pp. 351–370

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Tullio, G. The Role of Savings and Investment in Current Account Determination: The Case of the Federal Republic of Germany (1973 - 1979). Credit and Capital Markets – Kredit und Kapital, 16(3), 351-370. https://doi.org/10.3790/ccm.16.3.351
Tullio, Giuseppe "The Role of Savings and Investment in Current Account Determination: The Case of the Federal Republic of Germany (1973 - 1979)" Credit and Capital Markets – Kredit und Kapital 16.3, 1983, 351-370. https://doi.org/10.3790/ccm.16.3.351
Tullio, Giuseppe (1983): The Role of Savings and Investment in Current Account Determination: The Case of the Federal Republic of Germany (1973 - 1979), in: Credit and Capital Markets – Kredit und Kapital, vol. 16, iss. 3, 351-370, [online] https://doi.org/10.3790/ccm.16.3.351
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The Role of Savings and Investment in Current Account Determination: The Case of the Federal Republic of Germany (1973 - 1979)

Tullio, Giuseppe

Credit and Capital Markets – Kredit und Kapital, Vol. 16 (1983), Iss. 3 : pp. 351–370

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Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.16.3.351
Language
Multiple languages
Pages
20

Tullio, Giuseppe

References

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  5. Artus, Jacques R. and John H. Young: “Fixed and Flexible Exchange Rates: A Renewal of the Debate,” International Monetary Fund, Staff Papers, Vol. 26 (December 1979): 654-698. - Artus, Jacques R.: “Monetary Stabilization With and Without Government Credibility,” mimeograph, International Monetary Fund, 1980.  Google Scholar
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  13. McKinnon, Roland I.: “Exchange Rate Instability, Trade Imbalances, and Monetary Policies in Japan and the United States,” mimeograph, 1978.  Google Scholar
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  23. Artus, Jacques R.: “Exchange Rate Stability and Managed Floating: The Experience of the Federal Republic of Germany,” Staff Papers, Vol. 23 (July 1976): 312-333.  Google Scholar
  24. Artus, Jacques R. and Anthony G. Turner: “Measures of Potential Output in Manufacturing for ten Industrial Countries 1955 - 1980,” mimeograph, International Monetary Fund, May 1978.  Google Scholar
  25. Artus, Jacques, R.: “Persistant Surpluses and Deficits on Current Account Among Industrial Countries,” mimeograph, International Monetary Fund, May 1979.  Google Scholar
  26. Artus, Jacques R. and John H. Young: “Fixed and Flexible Exchange Rates: A Renewal of the Debate,” International Monetary Fund, Staff Papers, Vol. 26 (December 1979): 654-698. - Artus, Jacques R.: “Monetary Stabilization With and Without Government Credibility,” mimeograph, International Monetary Fund, 1980.  Google Scholar
  27. Branson, William H.: “Monetary Policy and the New View of International Capital Movements,” Brookings Papers No. 2 (1970): 235 - 270.  Google Scholar
  28. Branson, William H.: “Asset Markets and Relative Prices in Exchange Rate Determination,” Seminar Paper No. 66, Princeton University and Institute for International Economic  Google Scholar
  29. Studies, Stockholm University, 1976.  Google Scholar
  30. Federal Reserve Bank of Australia: Conference in Applied Economic Research, December 1977.  Google Scholar
  31. Frenkel, Jacob A. and Harry G. Johnson: “The Monetary Approach to the Balance of Payments,” London, Allen and Unwin, 1976.  Google Scholar
  32. Kindleberger, Charles P., 1976: “Germany’s Persistent Balance of Payments Disequilibrium Revisited,” Quarterly Review, Banca Nazionale del Lavoro, 29 (June 1976): 135 - 164.  Google Scholar
  33. Laursen, Svend and Lloyd A. Metzler: “Flexible Exchange Rates and the Theory of Employment,” The Review of Economics and Statistics, Vol. 32 (November 1950): 281 - 299.  Google Scholar
  34. McKinnon, Roland I.: “Exchange Rate Instability, Trade Imbalances, and Monetary Policies in Japan and the United States,” mimeograph, 1978.  Google Scholar
  35. Metzler, Lloyd A.: “Wealth, Saving and the Rate of Interest,” Journal of Political Economy, Vol. 59 (April 1951): 93 - 116.  Google Scholar
  36. Prais, S. J.: “Mathematical Notes on the Quantity Theory of Money in an Open Economy,” International Monetary Fund Staff Papers, 8 (January 1960): 1 - 28.  Google Scholar
  37. Richard, Denis: “A Global Adjustment Model of Exchange and Interest Rates: Empirical Analysis,” in: T. Taya and D. Bigman (editors): “The Functioning of Floating Exchange Rates: Theory, Evidence and Policy Implications,” Ballinger, Cambridge, Mass., 1980. - Sommariva, Andrea and Giuseppe Tullio: “Macroeconomic Policy, Inflation and Growth, 100 Years ‘of German Economic History,” mimeograph, International Monetary Fund, 1980, forthcoming as chapter 2 of a book with the same title by the same authors, Macmillan, London, 1984.  Google Scholar
  38. Steinherr, Alfred: “ On the Reliability of the Exchange Rate to Restore Balance of the Current Account,” IMF, Staff Papers, Vol. 28 (March 1981).  Google Scholar
  39. Steinherr, Alfred and Colette Morel: “Une Analyse des Effects de Röevaluation en Allemagne FEed£rale,” Recherches Economiques de Louvain, 45 (March 1979): 95 - 108.  Google Scholar
  40. Tullio, Giuseppe: “Demand Management and Exchange Rate Policy: The Italian Experience,” International Monetary Fund Staff Papers, Vol. 28 (March 1981) (a).  Google Scholar
  41. Tullio, Giuseppe: “The Monetary Approach to External Adjustment: A Case Study of Italy,” Macmillan, London, (August 1981) (b).- Wymer, Clifford: “ Continuous Time Models in Macroeconomics: Specification and Estimation,” mimeograph, London School of Economics, 1976.  Google Scholar
  42. Wymer, Clifford: “The Use of Continuous Time Models in Economics,” mimeograph, International Monetary Fund, 1979  Google Scholar

Abstract

The Role of Savings and Investment in Current Account Determination: The Case of the Federal Republic of Germany (1973 - 1979)

The paper contains a small disequilibrium macroeconomic model for Germany, which is intended to study the mechanism of adjustment of the German current account under flexible exchange rates. The model is also estimated on quarterly data from the first quarter of 1973 to the third quarter of 1979 using Wymer’s programs. The main hypothesis underlying the model is that German current account developments cannot be properly understood without reference to the behaviour of savings and investment, the ex post difference in which must be equal to the current account, if the government budget deficit is equal to zero. Thus the model departs from previous empirical work on the current account in that its focus is on the savings and investment functions rather than import and export demand functions. The main channels through which a depreciation of the exchange rate affects the current account that are considered in the model are (i) the real wealth effect on savings. The depreciation is assumed to increase the price level and this reduces the real value of wealth and hence savings. If the depreciation occurs at a time when the current account isin deficit, as has been the case in recent years, this effect tends to retard the adjustment of the current account. (ii) The real interest rate effect on savings. This effect is equilibrating if under the circumstances outlined above (depreciation occurring at a time of current account deficit) the real interest rate tends to increase as a result of balance of payments deficits and outflows of money from the country. (iii) The real interest rate effect on investment, which is also equilibrating under the above assumptions. (iv) The terms of trade effect on investment, which is assumed to affect investment positively. Hence, when the exchange rate depreciates, if import prices increase more rapidly than export pricesin domestic currency investment tends to fall and to contribute towards reabsorption of the current account deficit. | All these four channels are shown to have been empirically significant for Germany during the flexible exchange rate period. The model also contains demand functions for financial assets held by Germans abroad and by foreigners in Germany. They are relevant in order to endogenize the balance of payments and reserve flows, which are an important factor in interest rate determination

Table of Contents

Section Title Page Action Price
Giuseppe Tullio: The Role of Savings and Investment\rin Current Account Determination: The Case\rof the Federal Republic of Germany (1973 - 1979) 351
I. Introduction 351
II. A Model of the German Current Account and of the DM-US Dollar Exchange Rate 353
III. Estimates of Parameters 361
IV. Concluding Comments 364
Appendix 365
References 367
Zusammenfassung: Die Bedeutung von Sparen und Investieren für die Entwicklung der Leistungsbilanz: Fall Bundesrepublik Deutschland (1973 - 1979) 368
Summary: The Role of Savings and Investment in Current Account Determination: The Case of the Federal Republic of Germany (1973 - 1979) 369
Résumé: La signification de l'épargne et des investissements pour le développement de la balance des paiements: cas de la République Fédérale d'Allemagne (1973 - 1979) 369

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