International finance 120181-1165 Global unequilibrium.

International finance 120181-1165

Global unequilibrium


Lecture outline

Definitions and indicators of the global

unequilibrium

Factors determining the global unequilibrium

The traditional view and the new paradigm

Potential solutions


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


The global unequilibrium- definition

The real economy and the monetary aspect

Important players on the global market The risk of a global unequlibrium


The global unequilibrium- indicators

The current account deficit

International investment position

Foreign reserves


The global unequilibrium- indicators


The global unequilibrium- factors

Structural factors

Cyclical factors


The global unequilibrium- cycylical factors

Short term global demand

Asset prices

Business cycles

Government savings

Oil prices


The global unequilibrium- structural factors

Long term trends

The Lucas paradox

The decrease of savings

Market structures ~ the share in global

production


The Lucas paradox

Risk premium in catching-up countries

Capital flow limitations

Underdeveloped financial market


Sources of the global unequilibrium

International financial integration

Various ER systems

Economic policy strategies


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


Global unequilibrium- potential explanations

Twin deficits

ER policy in Asian countries

Productivity growth in the USA

Global saving glut


Twin deficits

Fiscal deficit in the USA Structural fiscal deficit The interest rate channel


ER policy in Asian countries

Export supporting strategy

ER interventions i% decrease in the USA

Warnock i Warnock (2005)

Roubini i Setser (2005)


Bretton Woods II

Dooley et al. (2003; 2004; 2005)

The global economy USA as a centre

Trade region- Asia

Capital region- Europe, Canada, Australia


Bretton Woods II

Asymmetry Underdeveloped financial market in China Financing the US CA deficit ad infinitum


Bretton Woods II

The stability of Bretton Woods II

Critique- Goldstein i Lardy (2005)

Large differences between the economies

constituting the „trade region”


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


Global saving glut

USA as a „consumer of last resort”

Factors: Restructuring companies

Oil prices increase

Economic situation in Asian countries


Global saving glut?

Źródło: IMF Economic Outlook 2005


Global liquidity glut

Bracke i Fidora (2008)

Monetray shocks???

Decreasing propnesity to save???

Increased investment in the USA vs.

other countries???


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)


The traditional view

Decrease of US savings

Consequences of the US monetary and

fiscal policy

„Sudden stop”

ER and i% effects


The traditional view

Sustainability of the US borrowing

„Portfolio balancing”

„Greenspan conundrum”


The new pradigm

Structural changes in the world economy

Decrease of rates of return

Using the advantages of globalisation and

technological progress


Potential solutions

Obstfeld Rogoff – unsustainability of the deficit ad infinitum

versusBretton Woods II


Limiting the deficit

ER adjustments

Reinforcing the supply side of the deficit

countries

Asset prices adjusments


Limiting the deficit –empirical evidence

Internal demand adjustments

ER changes

Mixed strategy


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


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


The role of the international currency

“Exorbitant Privilege”

USD as the main reserve currency

Differences in rates of return between US

assets and liabilities


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


The solvency of economies

The global uneqilubrium and solvency

The sustainability of the unequilibrium

depends on: The level of income

Fiscal deficit

Foreign debt


Summing up

Structural and cyclical factors

The Lucas paradox

The factors of capital flow


Summing up

Thetraditional view and the new paradigm

Maintaining the Bretton Woods II

Classical and alternative solutions


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 Global unequilibrium.

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