Global imbalances
Lecture outline
 Global imbalances- definition and measures
Factors and sources of the imbalances
 Resolution possibilities
Global imbalances-definition
 External inequilibria in systemically
important economies, which pose risks to
the functioning of the global economy
 The risks: destabilization of the
international monetary system, financial
crises, protectionism
Global imbalances- elements
 Current account imbalances- majorly the
difference between exports and imports
Net foreign assets imbalances- the
difference between the value of the assets
of a country abroad and the value of the
domestic assets owned by foreigners
Source: Wikipedia
Measures of the global imbalances
(1)
Current account = Net foreign assets – the value
of central bank interventions
 The current account deficit influences the
foreign debt of the economy deficit
accummulation leads to increasing foreign debt
levels
The value of the foreign debt depends on the
valuation of assets and liabilities- exchange rate
changes can influence the value of the debt!!!
Measures of the global imbalances
(2)
 Current account imbalances- in a specific
time period
 International investment position- a
measure of net foreign asstes in a specific
time period
 Foreign reserves- indirect measure of
distortions
Measures of the global imbalances
(3)
Source: ECB
The factors of the global
imbalances
Structural factors
Cyclical factors
Cyclical factors
 Short-term global demand
 Asset prices- inluencing foreign debt levels
 Business cycles induced by productivity shocks
investment increase  increased imports current
account deficit
 Public savings the fiscal stance influences short-term
demand
 Oil prices changes  higher prices lead to higher
values of imports and exports
Structural factors
 Long-term trends
 The Lucas paradox
 The long-term decrease of savings
 Market structures and the share in global
production
The Lucas paradox
 Capital flows from developing countries to
developed countries despite the fact that
the second ones have higher levesl of
capital per worker
The reasons for occurrence of the
Lucas pradox
 Risk premium in catching –up countries
 Capital flow restrictions
 Underdeveloped financial markets in
developing countries
FDI flows to emerging countries, portfolio
investment flows to developed countries
Other structural factors
 The long-term decrease of savingsbusiness cycle moderation in the USA
The increased share of the USA in the
global output due to productivity growthexpectations of a continued faster growth
drive the US current account deficit
The sources of the unequilibrium (1)
 Competing theories
International financial integration
 The concept of the Bretton Woods II system
 Export oriented exchange rate policy strategies
in Asian countries
Twin deficits
 Production effectivity increase in the USA
Global savings glut
International financial integration
 International financial integration occurs if all market
participants have equal access to the instruments
traded and face the same set of rules while being active
on the market
 The liberalisation of capital flows enabled financial
integration
Twin deficits
 The budget deficit in the USA is
accompanied by the deficit of the current
account
 The increase of government spending
causes the growth of demand and
increases imports
Exchange rate policies
 Exchange rate policies supporting exports in
Asian countries
Central bank interventions preventing currency
appreciation accumulation of large foreign
reserves
 The inflow of foreign savings to the American
market the decrease of American interest
rates fuelling American demand
Bretton Woods II
 Dooley et al. (2003; 2004; 2005)
 The global economy can be portrayed as:
 USA as a center
 The trade region-Asia- fixed exchange rates,main
market players are central banks and governments
 The capital region- Europe, Canada, Australia,floating exchange rates, main market players are
private investors- a neutral region in terms of
imbalances
Bretton Woods II
Underdeveloped financial market in Chinait is easier to allocate the Chinese savings
abroad
 The financing of the US deficit ad
infinitum is profitable for China due to
increased exports
Permanent increase of production
effectiveness in the USA
 Increase of effectiveness higher rates
of returns on the American asset market
 FDI- net negative inflow and decreasing
purchase of American stock counterdicts
the hypothesis of increased effectiveness
– it was only valid until the late 90-ties
Global savings glut
 USA as the consumer of last resort- competing explanation to the
Bretton Woods II
 Factors:
 Restructuring of enterprises profits increase -> increased
savings in the sector of enterprises
 The increase of oil prices- increased value of savings in oil
exporting countries
 A high propensity to savings in Asian countries and labour
force migration  increased savings in the destination
countries
A global savings glut?
Source: IMF Economic Outlook 2005
Potential resolution
 Setser,Obstfeld, Rogoff – the deficit can
not be maintained ad infinitum
versus
 Maintainance of the Bretton Woods II
Maintainance of Bretton Woods II
 The credibility of USD- investors believe in maitaining of
the current exchange rate policy i.e. large interventions
of the Chinese central banks
 No significant difference in the short term and long term
interest rates reflects the expectations of the status quo
 Maintainance of the Chinese exchange rate policy –
long term cost of production restructuring
 Reluctance to increase US savings
The collapse of Bretton Woods II
 Reluctance of Asian central banks to increase reserves
 The cost of reserve maintainance- the appreciation of the remninbi
increases the value of liabilities and decreases the value of the
assets held in USD
 The costs of interventions- high levels of reserves cause credit
expansion and inflationary pressure despite sterilization
 Cost for Chinese state-owned banks- the necessity to purchase low
premium government bonds the necessity to recapitalize banks
 The Chinese manufacturing is to a large extent foreign-owned and
its production is consumed dometically
 The trade region is very differentiated- no common policies
Mitigation of the imbalances
 Exchange rate adjustments
 Strenghtening of the supply-side of the
deficit countries
 Ajustment of the asset prices
 International cooperation- a consensus
has to be reached by the main market
players
The global imbalances and
financial stability
The global imbalances impact negatively
the financial stability
The international monetary system does
not fulfill its functions properly i.e.
impedement of the exchange rate stability
function, liquidity provision function etc.
The global imbalances are blamed as one
of the reasons for the latest financial crisis
The role of the international
currency
 “Exorbitant Privilege”
 USD as the main reserve currency
 Differences in the interest on US assets and
liabilities
USA possess profitable assets in the form of FDI
and stocks, US liabilities are low yield banking
deposits and bonds
The need of cooperation
The resolution can not be carried out by single
countries- the need of global cooperation
 The willingness to maintain the inequilibrium
depends on the features of the economies
 Income
 Public balance
 Foreign debt
Literature
 M. Rubaszek, Nierównowaga globalna: przyczyny oraz
możliwe rozwiązania, Bank i Kredyt, 2006,
 Adjustment of global imbalances in a finacialy
integrating world, ECB Monthly Bulletin, 08/2007,
 M. Xafa, Global imbalances and financial stability, IMF
Working Paper, 2007
 T. Bracke, M. Fidora, Global liquidity glut or global
savings glut, ECB Working Paper, 2008.