External Imbalances and the Valuation Channel

Whitehead, Basil Thomas

External Imbalances and the Valuation Channel

Master Thesis

2017

Publisher

University of Cape Town

Department

School of Economics

Faculty

Faculty of Commerce

Abstract

South Africa has been a net debtor of international capital since the South African Reserve Bank began measuring the international investment position in 1956. This surplus in the financial account has been partially used to finance the persistent current account deficit, which has given rise to a large negative net international financial position. The current practice for calculating the size of the financial account is to net off the size of the foreign assets and foreign liabilities, where use is made of the flow values at the date of transfer. In this paper we seek to incorporate the effects of changes in the values of these foreign assets and liabilities, which would ultimately effect the sustainability of an external imbalance. After we derive appropriate measures of the respective variables, we make use of a Bayesian structural vector autoregressive model that is able to capture stylised features that relate to the volatility of financial returns. We find that an increase in returns acts in a similar way to that of an improvement in the trade balance, which provides a more favourable external imbalance.

Keywords

Economics

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