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 savings-

business cycle moderation in the USA

The increased share of the USA in the

global output due to productivity growth-

expectations 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 China-

it 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.