1. Global imbalances

2. Lecture outline Global imbalances- definition and measures
Factors and sources of the imbalances
Resolution possibilities

3. 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

4. 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

5. Source: Wikipedia

6. 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!!!

7. 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

8. Measures of the global imbalances (3)
Source: ECB

9. The factors of the global imbalances
Structural factors
Cyclical factors

10. 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

11. Structural factors Long-term trends The Lucas paradox
The long-term decrease of savings
Market structures and the share in global production

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. A global savings glut?
Source: IMF Economic Outlook 2005

24. Potential resolution
Setser,Obstfeld, Rogoff – the deficit can not be maintained ad infinitum
versus
Maintainance of the Bretton Woods II

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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.