Global Imbalances from a Stock Perspective

Abstract

After the recent crisis, a reduction was observed in global current account (“flow”) imbalances. Even so, global disequilibria as measured in terms of countries’ net foreign assets (“stock imbalances”) kept increasing. This paper discusses whether stock imbalances have a stabilising or destabilising impact on countries’ accumulation of external wealth. That is, do creditor economies, by virtue of their positive stock of net foreign assets, keep accumulating — everything else equal — external wealth? Do debtor countries, due to their negative net foreign assets position, keep accumulating external debt? Our results show that in debtor economies the existing stock of net debt helps to limit current account deficits, thus halting future debt accumulation. In creditor countries, however, the positive stock of net foreign assets contributes — everything else equal — to increase future current account surpluses, potentially leading to destabilising dynamics in wealth accumulation. This asymmetry between creditors and debtors holds in spite of the stabilising impact that net foreign assets have on the trade balance of creditor countries through real exchange rate fluctuations, and might have major implications for global trade and growth.