Caballero, emmanuel farhi, and pierreolivier gourinchas at the conference, international monetary stability. In the wake of the financial crisis, many observers and policymakers have singled them out as a key factor contributing to the turmoil bernanke 2009, economist 2009, king 2010, krugman 2009, and portes 2009. This paper addresses the difficult questions of transmission at the zlb, how liquidity traps spread from one country to another, the role of fiscal policy, currency wars, demand for safe assets and several other important issues. My comments are here, the paper is here the paper is a very clever and detailed model of global imbalances, safe asset. Global imbalances or, more precisely, global current account imbalances, refer to the large current account deficits and surpluses that have emerged in the world economy during the last 10 years. We construct a dynamic general equilibrium model with several mechanisms that could generate declining goodssector employment. Safe assets and global safe asset shortages i endogenous risk premia,increases at the zlb i links reserve currency paradox and exorbitant privilege i can have zlb in one country but not other 6 real interest rates i policy. Part 1 highlights the build up in imbalances and what effect the global financial crisis has had. Global imbalances and currency wars at the zero lower bound. Prima facie, the imbalances seem a significant problem.
Jul 26, 2011 global currentaccount imbalances have been at the forefront of policy debates. E0,f3,f4,g01 abstract this paper explores the consequences of extremely low equilibrium real interest rates in a world with. Global imbalances and currency wars at the zlb emmanuel farhi. Global imbalances and currency wars at the zlb ricardo j. Global imbalances, financial crisis and economic recovery. Paper on global imbalances and currency wars at the zlb. May 06, 2016 i gave some comments on global imbalances and currency wars at the zlb, by ricardo j. Part 2 will look at the future of these imbalances and the likelihood that. Currency wars yesterday and today milan brahmbhatt, otaviano canuto, and swati ghosh an energetic debate on the danger of a global currency war has flared up in recent months, stoked by a renewed move to quantitative easing in the united states, resurgent capital flows to developing countries and strong upward pressure on. These downsides could include depressed global demand and increased protectionist sentiment in deficit countries. Sadly, most americans are completely unaware of the dangers surrounding them and are still just hoping for the best. For the most part, the imbalances have been heavily. The book contains a strictly international perspective with an analysis based on empirical research that enables the reader to develop an analytical model that emphasizes interactions among. Global imbalances, financial crises, and central bank.
Global imbalances refers to the situation where some countries have more assets than the other countries. Global imbalances and currency wars at the zlb semantic scholar. Among the new dangers are threats not just to americas economic wellbeing but to our national security as well. Global imbalances and structural change in the united states. Economics from duke university, and before joining the imf staff, he was. However, acknowledging that would question mainstream economics celebratory stance toward globalization. This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. Provided for noncommercial research and educational use. Global current account imbalances and exchange rate adjustments. Global imbalances and structural change in the united. Global imbalances, financial crisis and economic recovery g. Global imbalances, financial crises, and central bank policies is a very wellconceived manuscript on the nexus of reserve hoarding and capital flow, and the implications for the global economy. Global imbalances and currency wars at the zlb by caballero. Current account deficit, speech delivered at the sandridge lecture, virginia association of economists, richmond, va.
Recent developments and prospects, speech delivered at the bundesbank lecture, berlin, germany, september 11. Part 2 will look at the future of these imbalances and the likelihood that they will be removed by major changes in trade from asia. Global imbalances and currency wars at the zlb emmanuel. Global imbalances and currency wars at the zlb by caballero, farhi, gourinchas author. Bernanke says global imbalances bedevil the world economy. This is a three part series looking at global imbalances. Global imbalances and currency wars at the zlb harvard university.
By the same token, the indeterminacy implies that if agents coordinate on an appreciated. Internal trade imbal ances between northern and southern europe have also been. By facilitating the allocation of the worlds savings to the most productive uses, the free flow of capital across national borders confers. Global imbalances and exchange rate adjustment sciencedirect.
At present, the us is faced with sizable deficits on both its budget the excess of government spending over revenues and its current account the excess of what americans spend on goods, services and funds transferred abroad. The economists latest solutionssuch as the global currency called the sdrpresent hidden new dangers while resolving none of the current dilemmas. Revised february 2020 a previous version of this paper was circulated under the title. Caballero emmanuel farhi pierreolivier gourinchas this draft. Thus, our model speaks to the debates surrounding currency wars. Global imbalances and policy wars at the zero lower bound. Global current account imbalances are one of the key macroeconomic imbalances that underlie the global financial crisis. Products of common causes maurice obstfeld and kenneth rogoff authors note. Hence, if the current account is persistently showing deficits for certain period it is said to show an inequilibrium.
The us dollars function as the worlds main reserve. External positions of systemically important economies that reflect distortions or. An escalation of protectionist policies would mainly hurt domestic and global growth, without much of an effect on current account imbalances, as this years report also finds. Jul 24, 2018 the persistence of global imbalances and mounting perceptions of an uneven playing field for trade are fueling protectionist sentiment. Global currentaccount imbalances have been at the forefront of policy debates. The international adjustment process is starting to work a. Capital flows, exchange rates, unemployment and risk premia.
We thank chris ackerman, mark aguiar, manuel amador, cristina arellano, olivier blanchard, luca fornaro, jordi gali, gita gopinath, nobuhiro. Since the early 1990s, as the united states borrowed heavily from the rest of the world, employment in the us goodsproducing sector has fallen. Global imbalances and currency wars at the zlb ideasrepec. Using the linearity of the equilibrium equations, we can combine the asset market clearing. An alternative perspective on global imbalances and. The global imbalances are in the origin of the present crisis, although the crisis has not arisen due to a withdrawal of foreign funds but to the incapacity of the north american financial system to recycle the excess of world liquidity it was receiving. The adb economics working paper series is a quickdisseminating, informal publication whose titles could subsequently be revised for publication as articles in professional journals or chapters in books. This chapter was originally published in the evidence and impact of financial globalization published by elsevier, and the attached copy is provided by elsevier for the authors benefit and for the benefit of the authors institution.
Reducing imbalances may also benefit the global community, making it less vulnerable to contagion from financial crises or to the downsides of excessive surpluses. November 9, 2015 abstract this paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets, and nominal rigidities. Global imbalances and the financial crisis note abstract in this paper, i consider the relationship between factors that caused the global imbalances of 1997 2006 and the current financial crisis. I ask what should and can be done to dampen global imbalances in the future. Global imbalances and currency wars at the zlb by ricardo. In all these cases, it would be unwise to want to reduce imbalances. Bernanke says a global savings glut, caused by people and governments overseas saving too much, has driven unemployment up in the united states, and driven wages, g. Global imbalances there is compelling evidence about the fact that global imbalances, in terms of large current account deficits and surpluses in different countries, tend to produce bubbles, and. Caballero 2006 added global imbalances and asset price bubbles to the list of effects of a supposed shortage of safe assets caballerofarhigourinchas 2008 model the global imbalances story, stressing the inability of emerging market economies to create safe assets and the superiority of us safe assets. The fact is that, when interest rates are near or at the zerolowerbound, the. They reflect the optimal allocation of capital across time and space. Global imbalances, saving glut, money, credit, capital flows, current account, interest rates, financial crisis. Global imbalances, financial crises, and central bank policies assesses the relationships between global imbalances, financial crises, and central bank policies, with a specific focus on their reserves.
Hence, if the current account is persistently showing deficits for certain period it is said to show an. Global imbalances and policy wars at the zero lower bound nber. Large imbalances increase the expected volatility of the exchange rate, and potentially reduce the flexibility of response to shocks e. Global current account imbalances and exchange rate. Global imbalances and currency wars at the zlb san francisco fed.
Global imbalances before and after the global crisis. Not for reproduction, distribution or commercial use. March 11, 2016 abstract this paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but. Addressing global imbalances requires cooperation imf blog. Global imbalances before the analysis of the links of global imbalances and financial crisis, it is necessary to define the concept of global imbalances. March 10, 2016 abstract this paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. In their model, countries run trade imbalances and nanciers absorb the resultant currency risk, that is, nanciers are long the debtor country and short the creditor country. Caballero, emmanuel farhi, pierreolivier gourinchas. This is the diagnosis of the economic report to the us president in 2009. Knightians invest in safe assets combining puts and calls.
Currency wars takes us on a whirlwind global tour from peking to moscow to dubai, where governments and even everyday citizens are already hedging themselves against a declining u. I gave some comments on global imbalances and currency wars at the zlb, by ricardo j. During this period of rapid trade growth, global current account imbalances also expanded rapidly. One longerterm problem that continues to haunt the prospects for a sustained recovery is the large. This column summarises the variety of explanations of the relationship between imbalances and the crisis. We thank chris ackerman, mark aguiar, manuel amador. While the debate continues, it suggests that, as a matter of prudence, policies to contain global imbalances may still be warranted even if they did not trigger the crisis. March 11, 2016 abstract this paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities.
Jun 14, 2010 did global imbalances cause the global crisis. In theory, when the current account is in balance, it has a zero value. We use our model to shed light on the evolution of global imbalances,interest rates, and exchange rates since the beginning of the global financial crisis. Caballero, emmanuel farhi, and pierreolivier gourinchas nber working paper no. The series is maintained by the economics and research department. Chinn university of wisconsin, madison, wi, usa nber, cambridge, ma, usa outline the contested landscape of global imbalances 67 global imbalances defined 68 spendthrift america and the savinginvestment approach 70 a us productivity surge and the intertemporal approach 71 east asian mercantilism and bretton woods ii. True, if some shock such as a rise in foreign demand were to close up the global imbalances absent any concomitant weaknesses, the damage might well be contained to exchange rates and to the collapse of a few large banks and financial firms along with. The persistence of global imbalances and mounting perceptions of an uneven playing field for trade are fueling protectionist sentiment. There have also been renewed calls for the introduction of an international reserve currency to replace the u. The adb economics working paper series is a forum for stimulating discussion and. Global imbalances and policy wars at the zero lower bound ricardo j. Financiers, however, are nancially constrained, and this a ects their ability to take positions. Participants at the asia economic policy conference and especially discussant ricardo caballero offered helpful comments.
The central objective of this paper is to analyze the causes and consequences of global imbalances from the perspective of developing asia. In a speech given in march 2005 bernanke, 2005, i discussed a number of important and interrelated developments in the global economy, including the substantial expansion of the current account deficit in the united states, the equally impressive rise in the current account surpluses of many emergingmarket economies, and a worldwide decline in longterm real interest rates. A prominent view is that an excess of saving over investment in emerging market countries, as. Frank smets and seminar participants at london business school also contributed valuable suggestions. Past, present and future, hoover institution, may 5 2016. The global imbalances are best thought of as a vulnerability of the world economy rather than an inevitable driver of doom on their own. We characterize global imbalances at the zlb in terms of a metzler diagram in quantities. Section 6 discusses alternative scenarios for the future of global imbalances, their impact on developing countries, and the appropriate policy responses. But imbalances can be symptoms of underlying distortions, or be dangerous by themselves. The notion of national benefits against global negative externalities of reserve accumulation will interest both academics and policymakers.