This problem set focuses on national accounts and the current account/balance of payments troubles that some southern European countries have experienced recently. Specifically, you will investigate the current account balances and the net foreign asset position of the GIPS countries (Greece, Ireland, Portugal, and Spain) and compare them to Germany. In order to successfully complete the assignment you need to download two data sets. The first data source is the IMF’s World Economic Outlook Data Base (the excel file DataforHW3.xls contains all the data you need from this source). The second data set contains information on the net foreign asset position (or net international investment position) of a range of countries compiled by Philip L. Lane and Gian Maria Milesi Feretti, available online at http://www.philiplane.org/EWN.html where you also find a link to their paper.
1. Plot the current account to GDP ratio using the WEO data in the excel file DataforHW3.xls against time for each country and provide a short discussion of your graphs.
2. Compute the cumulative current account balance for each of your countries over your sample and discuss the implied change in the net foreign asset positions of each country and relate it to GDP in the most recent year.
3. Download the Lane-Milesi Feretti data (available as an excel file) and plot for each country the net foreign asset position (NFA) as calculated by Milesi Feretti and Lane in U.S. dollars for the four GIPS countries and Germany.
4. Compare the change in the NFA as calculated by Milesi Feretti and Lane with the CA balance data from the WEO database. What factors may explain these differences?
5. Assume it was the year 2005 and you looked at the developments of CA and NFA data for the GIPS countries. Now with the benefit of hindsight, what early signs of balance of payments trouble do you detect for these countries?
6. Use the data in the excel file DataforHW3.xls to compute the net private saving and national government saving as defined in equation (4.12) in BK. What is generating the budget deficits in the GIPS countries and Germany? Is it the case that large current account deficits are caused by large government budget deficits in these countries?