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Global unequilibrium 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 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 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 International finance 120181-1165 The global unequilibrium- indicators The current account deficit International investment position Foreign reserves International finance 120181-1165 The global unequilibrium- indicators International finance 120181-1165 The global unequilibrium- factors Structural factors Cyclical factors International finance 120181-1165 The global unequilibrium- cycylical factors Short term global demand Asset prices Business cycles Government savings Oil prices 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 International finance 120181-1165 The Lucas paradox Risk premium in catching-up countries Capital flow limitations Underdeveloped financial market International finance 120181-1165 Sources of the global unequilibrium International financial integration Various ER systems Economic policy strategies 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 International finance 120181-1165 Global unequilibrium- potential explanations Twin deficits ER policy in Asian countries Productivity growth in the USA Global saving glut International finance 120181-1165 Twin deficits Fiscal deficit in the USA Structural fiscal deficit The interest rate channel 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) 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 International finance 120181-1165 Bretton Woods II Asymmetry Underdeveloped financial market in China Financing the US CA deficit ad infinitum 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” 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 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 International finance 120181-1165 Global saving glut? Źródło: IMF Economic Outlook 2005 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??? 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) 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 International finance 120181-1165 The traditional view Sustainability of the US borrowing „Portfolio balancing” „Greenspan conundrum” 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 International finance 120181-1165 Potential solutions Obstfeld Rogoff – unsustainability of the deficit ad infinitum versus Bretton Woods II International finance 120181-1165 Limiting the deficit ER adjustments Reinforcing the supply side of the deficit countries Asset prices adjusments International finance 120181-1165 Limiting the deficit –empirical evidence Internal demand adjustments ER changes Mixed strategy International finance 120181-1165 Maintaining Bretton Woods IIpotential 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 International finance 120181-1165 Collapse of Bretton Woods IIpotential reasons The lack of willingness of Asian CB to increase foreign reserves The costs of maintaining reserves The costs of interventions 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 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 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 International finance 120181-1165 Summing up Structural and cyclical factors The Lucas paradox The factors of capital flow International finance 120181-1165 Summing up Thetraditional view and the new paradigm Maintaining the Bretton Woods II Classical and alternative solutions 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. International finance 120181-1165