Presentation on theme: "GLOBAL IMBALANCES: DO NET CAPITAL FLOWS STILL MATTER? AN INTERNATIONAL MACROECONOMIC PERSPECTIVE Hélène Rey London Business School, CEPR and NBER De Nederlandsche."— Presentation transcript:
GLOBAL IMBALANCES: DO NET CAPITAL FLOWS STILL MATTER? AN INTERNATIONAL MACROECONOMIC PERSPECTIVE Hélène Rey London Business School, CEPR and NBER De Nederlandsche Bank, 2013
Draw on: “Exorbitant Privilege and Exorbitant Duty”, with Gourinchas and Govillot (2012) “The Financial Crisis and the Geography of Wealth Transfers”, with Gourinchas and Truempler (2012) Reforming the International Monetary System with Farhi and Gourinchas (2012) Chapter for Handbook of International Economics, in preparation, with Gourinchas
Financial Globalization Large increase in international investment positions especially among advanced economies Trade in financial assets has outpaced trade in goods and services Financial globalization has gathered pace since the 1990s.
Financial crises International economists traditionally look at current account deficits to predict crises or to forecast consequences of crises. Financial globalization makes net capital flows less relevant. Gross capital flows are now key to understand the transmission of international crises.
External balance sheets Large cross border positions are a vector of both risk sharing and financial contagion Emerging markets and advanced economies have very different external portfolios Advanced economies are long in risky assets, emerging markets are long in safer assets (reserves) Structure of debt portfolio key to understand crisis transmission (Treasuries versus private label AAA assets)
The World Banker The United States is the centre country of the International Monetary System The United States is the world banker: US issues short-term low-risk assets (T-bills) US invests in high risk foreign assets (foreign equity and direct investment) Earns excess returns on its external position: “exorbitant privilege”.
The United States as a Global Insurer During latest crisis, US net foreign asset position deteriorated massively: Between 2007:4 and 2009:1, Net Foreign Assets drop by about USD 2.9 tr. US liabilities held up well (US issuer of the reserve currency, safe haven) and risky assets plummeted. A deterioration in the Net Foreign Asset position is a wealth transfer to the rest of the world. Similar to an insurance payment in crisis time.
Balance sheets matter Geography of wealth transfers during the crisis Different fortunes depending on portfolio structure Countries long equity or FDI tend to have valuation losses Structure of debt portfolio key: government debt versus corporate debt Correlation of losses with ABCP conduits, ABS investments, dollar shortage measure and losses on debt portfolio
Future: A New Triffin Dilemma? In the 1960s currencies could be exchanged at a fixed rate against the dollar whose value was fixed against gold. Triffin observed that global liquidity demand was outgrowing the United States’ gold reserves (backing the dollars held abroad). Maintaining the gold value of the dollar was increasingly difficult. Similarly, fiscal capacity of the dollar is not unlimited Backing of the dollar assets becomes gradually smaller in a world where relative size of the US shrinks. New Triffin Dilemma
Conclusions Solving the New Triffin Dilemma (Farhi Gourinchas Rey 2011): develop alternatives to US Treasuries as the dominant reserve asset: multipolar system with the issuance of mutually guaranteed European Bond; open up Chinese financial account, convertibility of the yuan. More broadly: tracking external balance sheet of countries useful to understand financial vulnerabilities.