[I am presenting this paper on a seminar in Barcelona the 14th of October]

The primary manifestation of the demographic transition in a modern economic context is through ageing and the primary transmission from ageing to the macro economy is through its effect on saving and investment behavior. These two effects taken together suggest a strong impact from the continuing process of ageing on international capital flows and global macroeconomic imbalances. This paper explores the potential relationship between ageing on a macroeconomic level and the reliance, or outright dependency, on exports and foreign asset income to achieve economic growth. The paper’s argument is both theoretical and empirical. Using a standard overlapping generation framework (OLG) in an open economy context this paper discusses whether the proposed relationship between a transition into old age and dissaving is feasible and desirable (or even optimal?). Finally, an empirical analysis is presented on Germany and Japan to show how these two economies, as the oldest in the world, may exactly be in a state of export dependency.

Executive Summary
 

Is the ECB deploying a variant of Quantitative Easing in any fashion, way, shape or form?

If you are talking about Quantitative Easing senso strictu then my answer has to be a simple and straightforward no. However, if we stop being quite so by the letter of the book, and broaden our definition slightly, then I would strongly suggest that the battery of credit enhancing measures put in place by the ECB when taken together with
the steady increase in securities accepted onto the balance sheet as collateral, do make it evident that the ECB - whether wittingly or unwittingly - has moved into some form of what we could at least call "quasi" Quantitative Easing.

Is the ECB indirectly monetizing the debt issuance of Eurozone governments?

If my initial answer to this question - before actually going through the books - would have been an outright yes, I now feel the need to tread much more carefully on this point, since I have most definitely not been able to conjure up that proverbial smoking gun. In fact, it has proved very difficult to establish any kind of direct link between the amount of funding drawn from the ECB refinancing operations and the purchase of government bonds by the MFIs at the national level.

This is not to say, however, that circumstantial evidence is not available that this process is taking place to some extent, and in some countries. I do believe, for example, that the massive purchase by Spanish MFIs of government bonds in that country does offer prima facie evidence that some such connection may well exist, and thus all I can say at this point is that further research is called for, and especially a much more detailed and discriminating data-mining dig-down. 

What are the prospects and possibilities for a viable exit strategy for the ECB from its non-standard monetary policy measures?

The measures collectively known as Enhanced Credit Support are by their very nature flexible. However, if there is anything we have learnt from the operation of monetary policy in Japan over the last twenty years it is that premature exit from the sort of substantial support the ECB is offering only makes matters worse, and in addition
this kind of massive liquidity easing is a lot easier to get into than it is to get out of.

A true economic recovery will inevitably be somewhat selective, and it is at this point that the ECB's problems will really start, since the recovery will begin in some countries and not in others. To take the extreme case: it will be awfully hard to maintain massive monetary easing for a Spanish economy which remains stuck in an "L" shaped non-recovery if in France headline GDP growth were to start to tick back again  towards - say - 2%. Then the real dilemmas which face the ECB will begin in earnest. As such, it is going to be much more difficult for the ECB to instigate that dearly beloved exit strategy than many currently like to believe.

Vistesen, Claus (2009) - Carry Trade Fundamentals and the Financial Crisis 2007-2010, Journal of Applied Economic Sciences, vol. IV issue 2(8)

This paper takes the form of an event study surrounding the current financial crisis. It proposes a theoretical relationship which can be used to model traditional carry trade crosses on a daily return basis as a negative function of equity returns and a positive function of market volatility. In order to test this theory, an Arbitrage Pricing Theory framework is adopted which is used to estimate the factor betas of carry trade crosses with respect to equity returns and market volatility. It is shown how the variation in the currency crosses explained by the functional relationship as well as the estimated factor betas have increased significantly in relation to the financial crisis. The results indicate that low yielding currencies (the JPY and CHF) can be successfully modeled as a negative function of equity returns and a positive function of volatility in the market. The results furthermore underpin studies that have shown how carry trading activity is highly sensitive towards sudden sparks of volatility and risk aversion, and thus how carry trade fundamentals are time varying.

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[under construction, but below the formal impetus is given in the introduction]

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The world is ageing. Even in spite of the fact that we know the global population is to increase from its current 6 billion to around 8-9 billion towards 2050 perhaps the most striking feature of this process will thus be the change in age composition that accompanies it. To complicate matters in a research related context and as a blurred veil over the changing composition and size of the global population we have the inescapable fact that the demographic transition is not over. Curiously, this point is rarely emphasized in economic research which deals concretely with the effects of demographic changes on the macroeconomic environment. Yet, it seems clear that the processes of lingering low [1] and declining fertility as well as rising life expectancy which are the immediate drivers of the process of ageing do not have an obvious theoretical limit. Furthermore, in the case of fertility there does not seem to exist a state of balance (homeostasis) by which fertility stabilizes at replacement levels. On the contrary a quick glance across the global economic edifice will confirm that replacement level fertility rates in the context of the developed economies [2] is the exception rather than the rule. In many OECD economies fertility rates are well below replacement levels and have been for nearly three decades. More worryingly, the overshooting of fertility towards lowest low levels appears to have decisively hit a wide range of developing economies from the transition economies in Eastern Europe to emerging Asia. Also in the Middle East, Northern Africa (the Maghreb) and the Latin-American continent fertility rates are heading firmly towards replacement levels and given the global tendency we should not expect it to stop here. However, perhaps the most striking feature of the demographic transition is that occurs in different tempi across countries something which is bound to have important macroeconomic implications.

The paper is formally structured in four sections. Section 1 begins in the well known tradition of standing on the shoulder of giants as it presents the theoretical impetus and framework for the empirical findings. Section 2 gives a brief helicopter tour of the subject in question Japan and its demographic development. Section 3 presents the data, the models estimated and the results from the estimations. Section 4 includes a perspectivation to the global economy as well as it concludes on the paper’s findings.

[1] Here we can distinguish between two regimes; low fertility which would be anywhere between 2.1 (replacement level) to 1.6 and lowest low fertility coined by the Austian demographer Wolfgang Lutz which would be <1.6.

[2] OECD

[3] 43.5 in April 2007 according to the CIA factbook.

[4] Data set from OECD’s database.

Ever since the credit turmoil took hold in the summer 2007 financial markets have been on the brink. Volatility in asset returns and correlations have been high and investors’ view on the underlying market fundamentals equally as fickle. Within that market context, this paper provides strong evidence for the idea of carry trading currencies as risk sentiment gauges in the market. Using daily returns from 2006 to May 2008 it is shown how traditional carry trading currency crosses (mainly JPY and CHF crosses) exhibit strong negative correlation and beta values with three key equity indices. This paper furthermore shows how this relationship, in relation to specific currency pairs, has been particularly strong since the advent of the credit crisis. Finally, this paper also homes in on the idea of carry trading currencies as means of hedging equity returns and fluctuations on a daily basis. At an initial glance such relationships are however bound to be highly spurious. As such, this paper also attempts to qualify its findings in a more general and solid empirical context.