Data and Regression Methodology
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)| false Bernanke, B., 2005, “ The Global Saving Glut and the U.S. Current Account Deficit,” Sandridge Lecture delivered to the Virginia Association of Economists, Richmond (March 10). Available on the Web at. http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm
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This paper has benefited from comments by our colleagues in the North American Division, Ashok Bhatia, and Calvin Schnure. Errors and omissions are the authors’ sole responsibility.
IMF staff calculations produce a 15–35 percent range of overvaluation, with others, such as those of Obstfeld and Rogoff (2005) suggesting more than 30 percent.
Defined as foreign currency per unit of domestic currency.
Indeed, for May 2006, 116 professional forecasters were surveyed for the euro-dollar forecast. To be sure, especially with respect to exchange rate forecasts, individual market participants can have widely differing views, potentially leading to different risk premium estimates for each participant. Notwithstanding this, the presumption of this paper is that the consensus forecast captures overall market sentiment.
Of course, actual exchange rate movements can be substantial as well. For example, in 2000, the dollar appreciated by over 15 percent against the euro.
For example, if the Bank of China instructed a private bank in London to buy U.S. Treasury bonds from a U.S. resident, this would show up in the TIC system as a treasury bond flow from the United States to the United Kingdom.
We thank Frank Warnock for providing us with the benchmark consistent TIC data, and readers interested in further details are referred to the aforementioned papers.
As noted in Warnock and Cleaver (2002), however, although benchmark surveys of U.S. assets should not suffer from financial center bias, surveys of U.S. liabilities probably do. This is because the identifier on a U.S. security provides only information on the custodian, which is not necessarily in the country of the actual owner of the security. Nonetheless, the bias is significantly less than in the raw monthly TIC data.
Emerging Asia includes China, Hong Kong SAR, India, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Taiwan Province of China, Thailand. Latin America excludes the Caribbean, which is included in “other”.
“Other” was also significant, but that is mainly because it includes offshore financial centers in the Caribbean, through which substantial investments into U.S. assets from the rest the world, and indeed from U.S investors to the rest of the world, are likely channeled.
It should also be noted that to the extent that there is any residual financial center bias in the benchmark consistent flows, the bias is likely to be more significant for flows from the United Kingdom given that it is one of the most important financial centers. For example, flows to and from oil exporters, which are difficult to track through the TIC system, may be an important component of net flows identified as coming from the United Kingdom.
The Organization of Economic Cooperation and Development (OECD) has compiled Composite Leading Indicators (CLIs) since the beginning of the 1980s for 22 member countries (http://www.oecd.org/std/cli). The CLIs are aggregate time series that show a leading relationship with the growth cycles of key macro–economic indicators (the average lead is 6 months). Typically, they are constructed to predict the cycles of total industrial production or gross domestic product in industry, which are chosen as proxy measures for the aggregate economy. CLIs are calculated by combining component series in order to cover, as far as possible, the key sectors of the economy. These component series cover a wide range of short-term indicators, such as observations or opinions about economic activity, housing permits, and financial and monetary data.
We also check the robustness of the results to this measure be constructing a similar measure that includes agency bonds in the numerator, given that such bonds are perceived by markets to come with a government guarantee.