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Global unequilibrium
International finance
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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
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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
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The global unequilibrium- definition
 The real economy and the monetary
aspect
 Important players on the global market
 The risk of a global unequlibrium
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The global unequilibrium- indicators
 The current account deficit
 International investment position
 Foreign reserves
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The global unequilibrium- indicators
International finance
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The global unequilibrium- factors
 Structural factors
 Cyclical factors
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The global unequilibrium- cycylical
factors
 Short term global demand
 Asset prices
 Business cycles
 Government savings
 Oil prices
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The global unequilibrium- structural
factors
 Long term trends
 The Lucas paradox
 The decrease of savings
 Market structures ~ the share in global
production
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The Lucas paradox
 Risk premium in catching-up countries
 Capital flow limitations
 Underdeveloped financial market
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Sources of the global unequilibrium
 International financial integration
 Various ER systems
 Economic policy strategies
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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
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Global unequilibrium- potential
explanations
 Twin deficits
 ER policy in Asian countries
 Productivity growth in the USA
 Global saving glut
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Twin deficits
 Fiscal deficit in the USA
 Structural fiscal deficit
 The interest rate channel
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ER policy in Asian countries
 Export supporting strategy
ER interventions  i% decrease in the USA
Warnock i Warnock (2005)
Roubini i Setser (2005)
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Bretton Woods II
 Dooley et al. (2003; 2004; 2005)
The global economy
 USA as a centre
 Trade region- Asia
 Capital region- Europe, Canada, Australia
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Bretton Woods II
 Asymmetry
 Underdeveloped financial market in China
 Financing the US CA deficit ad infinitum
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Bretton Woods II
 The stability of Bretton Woods II
 Critique- Goldstein i Lardy (2005)
 Large differences between the economies
constituting the „trade region”
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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
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Global saving glut
USA as a „consumer of last resort”
Factors:
 Restructuring companies
 Oil prices increase
 Economic situation in Asian countries
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Global saving glut?
Źródło: IMF Economic Outlook 2005
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Global liquidity glut
 Bracke i Fidora (2008)
 Monetray shocks???
 Decreasing propnesity to save???
 Increased investment in the USA vs. other
countries???
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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)
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The traditional view
 Decrease of US savings
 Consequences of the US monetary and
fiscal policy
 „Sudden stop”
 ER and i% effects
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The traditional view
 Sustainability of the US borrowing
 „Portfolio balancing”
 „Greenspan conundrum”
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The new pradigm
 Structural changes in the world economy
 Decrease of rates of return
 Using the advantages of globalisation and
technological progress
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Potential solutions
 Obstfeld Rogoff – unsustainability of the
deficit ad infinitum
versus
Bretton Woods II
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Limiting the deficit
 ER adjustments
 Reinforcing the supply side of the deficit
countries
 Asset prices adjusments
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Limiting the deficit –empirical
evidence
 Internal demand adjustments
 ER changes
 Mixed strategy
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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
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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
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The role of the international
currency
 “Exorbitant Privilege”
 USD as the main reserve currency
 Differences in rates of return between US
assets and liabilities
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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
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The solvency of economies
 The global uneqilubrium and solvency
 The sustainability of the unequilibrium
depends on:
 The level of income
 Fiscal deficit
 Foreign debt
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Summing up
 Structural and cyclical factors
 The Lucas paradox
 The factors of capital flow
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Summing up
Thetraditional view and the new paradigm
Maintaining the Bretton Woods II
Classical and alternative solutions
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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
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