1. International finance 120181-1165 Global unequilibrium

2. International finance 120181-1165 Lecture outline  Definitions and indicators of the global unequilibrium  Factors determining the global unequilibrium  The traditional view and the new paradigm  Potential solutions

3. International finance 120181-1165 The global unequilibrium- definition  External unequlibrium in countries which are important market players on the global market, constituting the menace of a collapse of the international monetary system

4. International finance 120181-1165 The global unequilibrium- definition  The real economy and the monetary aspect  Important players on the global market  The risk of a global unequlibrium

5. International finance 120181-1165 The global unequilibrium- indicators  The current account deficit  International investment position  Foreign reserves

6. International finance 120181-1165 The global unequilibrium- indicators

7. International finance 120181-1165 The global unequilibrium- factors  Structural factors  Cyclical factors

8. International finance 120181-1165 The global unequilibrium- cycylical factors  Short term global demand  Asset prices  Business cycles  Government savings  Oil prices

9. International finance 120181-1165 The global unequilibrium- structural factors  Long term trends  The Lucas paradox  The decrease of savings  Market structures ~ the share in global production

10. International finance 120181-1165 The Lucas paradox  Risk premium in catching-up countries  Capital flow limitations  Underdeveloped financial market

11. International finance 120181-1165 Sources of the global unequilibrium  International financial integration  Various ER systems  Economic policy strategies

12. International finance 120181-1165 Surplus and deficit countries  Surplus countries  China 296 bill. USD, Germany 131 bill. USD, Japan 110 bill. USD  Deficit countries  USA, -380 bill.USD, Spain -70 bill. USD

13. International finance 120181-1165 Global unequilibrium- potential explanations  Twin deficits  ER policy in Asian countries  Productivity growth in the USA  Global saving glut

14. International finance 120181-1165 Twin deficits  Fiscal deficit in the USA  Structural fiscal deficit  The interest rate channel

15. International finance 120181-1165 ER policy in Asian countries  Export supporting strategy  ER interventions  i% decrease in the USA  Warnock i Warnock (2005)  Roubini i Setser (2005)

16. International finance 120181-1165 Bretton Woods II  Dooley et al. (2003; 2004; 2005)  The global economy  USA as a centre  Trade region- Asia  Capital region- Europe, Canada, Australia

17. International finance 120181-1165 Bretton Woods II  Asymmetry  Underdeveloped financial market in China  Financing the US CA deficit ad infinitum

18. International finance 120181-1165 Bretton Woods II  The stability of Bretton Woods II  Critique- Goldstein i Lardy (2005)  Large differences between the economies constituting the „trade region”

19. International finance 120181-1165 Productivity growth in the USA  Fast productivity growth  higher rate of return on assets  The US financial market flexibility  FDI- negative net inflow  Fast productivity growth only until the end of the 90-ties

20. International finance 120181-1165 Global saving glut  USA as a „consumer of last resort”  Factors:  Restructuring companies  Oil prices increase  Economic situation in Asian countries

21. International finance 120181-1165 Global saving glut? Źródło: IMF Economic Outlook 2005

22. International finance 120181-1165 Global liquidity glut  Bracke i Fidora (2008)  Monetray shocks???  Decreasing propnesity to save???  Increased investment in the USA vs. other countries???

23. International finance 120181-1165 The traditional view and the new pradigm  Cline (2005), Obstfeld i Rogoff (2000, 2004), Roubini i Setser (2004)  Caballero et al. (2006), Cooper (2005), Dooley et al. (2003, 2004), Gave et al.(2005)

24. International finance 120181-1165 The traditional view  Decrease of US savings  Consequences of the US monetary and fiscal policy  „Sudden stop”  ER and i% effects

25. International finance 120181-1165 The traditional view  Sustainability of the US borrowing  „Portfolio balancing”  „Greenspan conundrum”

26. International finance 120181-1165 The new pradigm  Structural changes in the world economy  Decrease of rates of return  Using the advantages of globalisation and technological progress

27. International finance 120181-1165 Potential solutions  Obstfeld Rogoff – unsustainability of the deficit ad infinitum versus  Bretton Woods II

28. International finance 120181-1165 Limiting the deficit  ER adjustments  Reinforcing the supply side of the deficit countries  Asset prices adjusments

29. International finance 120181-1165 Limiting the deficit –empirical evidence  Internal demand adjustments  ER changes  Mixed strategy

30. International finance 120181-1165 Maintaining Bretton Woods II- potential reasons  USD credibility  Long term and short term i% differences  The lack of willingness to change the Chinese ER policy  The lack of willingness to increase US savings

31. International finance 120181-1165 Collapse of Bretton Woods II- potential reasons  The lack of willingness of Asian CB to increase foreign reserves  The costs of maintaining reserves  The costs of interventions

32. International finance 120181-1165 The role of the international currency  “Exorbitant Privilege”  USD as the main reserve currency  Differences in rates of return between US assets and liabilities

33. International finance 120181-1165 The role of the international currency  Schnabl, Freitag 2010  The assymetry of CA in countries using USD and EUR  The assymetry of CA in the USA and in countries using USD

34. International finance 120181-1165 The solvency of economies  The global uneqilubrium and solvency  The sustainability of the unequilibrium depends on:  The level of income  Fiscal deficit  Foreign debt

35. International finance 120181-1165 Summing up  Structural and cyclical factors  The Lucas paradox  The factors of capital flow

36. International finance 120181-1165 Summing up  Thetraditional view and the new paradigm  Maintaining the Bretton Woods II  Classical and alternative solutions

37. International finance 120181-1165 References  M. Rubaszek, Nierównowaga globalna: przyczyny oraz możliwe rozwiązania, Bank i Kredyt, 2006,  Adjustment of global imbalances in a finacially integrating world, ECB Monthly Bulletin, 08/2008,  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.