Current Global Imbalances Research Articles

The German Current Account Surplus and Krugman's Critique

Global structural imbalances in international trade have become a major topic in particular after the Great financial and economic crisis in 2008. China and Germany have been running major balance of trade in goods and services surpluses as well as balance of current account surpluses in the past decade. Contrary other countries including the US on top have run major current account deficits at the same time. Now, after some time of quarreling about the global recovery, this debate on – how to correct for those global imbalances – is back on the transatlantic agenda. This time Germany is the major villain, because last year Germany's current account surplus reached a 7 percent to GDP level. However, this is already rebalancing and the future new German government is planning policy measures like a major increase in public infrastructure investments, introducing a minimum wage for the whole economy, increasing public spending in education and training, which would stimulate domestic demand and growth in Germany in the coming year. The paper looks at the empirical facts of the past couple of years related to the rebalancing of international imbalances already under way. It confronts these findings with the harsh critique of Paul Krugman published in the New York Times, who blames German politics as the major source for the current global imbalances. Looking at the facts much of the blame Krugman addresses on misguided German politics cannot be confirmed to be in line with the available statistics and most recent forecasts.

Financial crisis and global imbalances: its labour market origins and the aftermath

The objective of this paper is to articulate how the 2007–09 economic crisis is rooted in the uneven income distribution and inequality caused by the current finance-led model of growth. The process of financialisation that took place in the 1980s in the USA and then in the European Union was coupled with labour flexibility, wage moderation and soaring profits. The flexibility agenda of the labour market and the end of wage increases, along with the contraction of indirect wages (i.e. public social expenditure), diminished workers’ purchasing power. This was partly compensated with increased borrowing opportunities and the boom of credit consumption, all of which helped workers to maintain unstable consumption capacity. However, in the long term, unstable consumption patterns derived from precarious job creation, job instability and poor wages have weakened aggregate demand. Hence, labour market issues such as flexibility, uneven income distribution, poor wages and the financial crisis are two sides of the same coin. Both have a direct impact on the economic crisis and the current global imbalances.

Current Account Imbalances

This article explores the impact of structural policies on saving, investment, and current accounts in OECD and non-OECD economies. Since the current account effects of structural reforms are often complex and ambiguous from a theoretical perspective, new OECD empirical analysis is carried out. Reduced-form equations are estimated for a panel of 30 OECD countries as well as for a panel/cross-section of 117 OECD and non- OECD countries that relate saving, investment and current accounts to policy indicators and a set of macroeconomic control variables. This work suggests that structural reforms may influence saving, investment and current accounts through their impact on macroeconomic conditions such as productivity growth or public revenues and expenditures, but also more directly: i) higher social spending (in particular on health care) is found to lower the saving rate and thereby to weaken the current account, most likely reflecting lower precautionary saving; ii) product market liberalisation temporarily boosts investment and thus also weakens the current account; iii) financial market deregulation may lower the saving rate, though only in less developed countries; iv) stricter employment protection may be associated with lower saving rates if unemployment benefits are low, as well as with higher investment rates possibly due to greater substitution of capital for labour. A scenario analysis indicates that fiscal consolidation and structural reforms in the main world economies could significantly reduce current global imbalances, possibly by about one-third.

Current Global Imbalances and the Keynes Plan

This paper proposes an interpretation of current global imbalances based upon the nature of the international currency, its main objective being to present a logical experiment, illustrating how alternative models of international financial organization may produce opposite results in the global economy. In the current organization, key currencies work as international money. Keynes, by contrast, proposed that this role should be assigned to a supra-national, credit money. While the world currently lives in what has been defined as a balance of financial terror, Keynes tried to achieve a more peaceful type of international balance. I argue that some of the technical provisions of the Keynes Plan may still - at least in principle - provide useful remedies for international disequilibria, by remedying some of the asymmetries of the current international monetary system and curbing both inflationary and deflationary pressures on the world economy.

Global current account adjustment: trade implications for the euro area countries

Although the euro area is not one of the major players in current global imbalances, the rebalancing of the current global imbalances is coupled with a significant appreciation of the euro against. In this paper, I present estimations of trade equations for individual euro area countries using a vector error correction model. Each euro area member has got a different trade elasticity, in the short as well as in the short run. Results show that exchange rate innovations affect individual euro area countries at different rates, complicating the response of the euro area’s one-size-fits-all monetary policy.

Current Global Imbalances and the Keynes Plan: A Keynesian Approach for Reforming the International Monetary System

This paper proposes a “logical experiment”, illustrating how alternative international monetary systems may produce opposite results in the global economy. In the current organisation, “key currencies” work as international money. Keynes, by contrast, proposed that this role should be assigned to a supranational, “credit” money. While the world currently lives in an asymmetric regime, which lead to what has been defined as a “balance of financial terror”, Keynes tried to achieve a more peaceful type of “international balance”. I argue that the structural reform and the technical provisions proposed by the “Keynes Plan” may still – at least in principle – provide useful remedies for international disequilibria, by remedying the asymmetries of the current international payments architecture and helping to curb both inflationary and deflationary pressures on the world economy.

Current global imbalances and the Keynes Plan: A Keynesian approach for reforming the international monetary system

This paper proposes a “logical experiment”, illustrating how alternative international monetary systems may produce opposite results in the global economy. In the current organisation, “key currencies” work as international money. Keynes, by contrast, proposed that this role should be assigned to a supranational, “credit” money. While the world currently lives in an asymmetric regime, which lead to what has been defined as a “balance of financial terror”, Keynes tried to achieve a more peaceful type of “international balance”. I argue that the structural reform and the technical provisions proposed by the “Keynes Plan” may still – at least in principle – provide useful remedies for international disequilibria, by remedying the asymmetries of the current international payments architecture and helping to curb both inflationary and deflationary pressures on the world economy.

Time for a New Global Currency?

This article surveys the prospects and implications of the potential replacement of the U.S. dollar as the world's key currency by the IMF's Special Drawing Rights (SDR) in the context of current global imbalances.

The Imf's Coordinated Growth Strategy of 1977/1978

The case documents the growth strategy that the IMF wanted to orchestrate after the first oil crisis and as the world economy did not return to the growth rates of the 1960s. The case illustrates the pinnacle of Keynesian thinking that prevailed at the time: a view of the international economy as an almost hydraulic system that could be manipulated by government policies at will to reach desirable aggregate targets. The failure of the strategy, among other things, emphasizes the importance of inflationary expectations. The case is also a nice opportunity to discuss the Phillips curve as well as the current global imbalances and what can be done about them. Excerpt UVA-G-0601 Rev. Aug. 4, 2009 The IMF's Coordinated Growth Strategy Of 1977/1978 In September 1973, Dr. H. Johannes Witteveen, a former finance minister of the Netherlands, took office as the fifth managing director of the International Monetary Fund (IMF), an independent U.N. organization that like no other organization oversaw the macroeconomics of the world economy. Exhibit 1 displays the size distribution of the world economy at the time. Witteveen's tenure at the helm of the IMF would be one of the most challenging since the IMF was founded at the Bretton Woods Conference of 1944. The Oil Crisis and its Aftermath In late 1973, the world woke up to soaring oil prices, as the Organization of Petroleum Exporting Countries (OPEC) reduced the world's oil supply. The Yom Kippur War between Egypt and Israel triggered OPEC's actions. OPEC announced that it would no longer ship petroleum to nations that had supported Israel. By 1974, oil prices had quadrupled to nearly $ 12 a barrel. . . .

Current Global Imbalances: Might Keynes Be of Help?

A large number of interpretations have been proposed for current global imbalances, with a variety of future scenarios for world economy. The perspective here adopted tries to be fully respectful of the assumption of global economic interdependence as well as to cope with the complexity of a political, and not exclusively an economic, problem. By the use of the three alternatives outlined by Keynes in his 1945 memorandum Overseas Financial Policy in Stage III for the restart of multilateralism at a global level, we propose to rearrange views about current imbalances according to the unilateral, bilateral or multilateral nature of the adjustment they propose - if any - for their unwinding. Comparisons are made between Keynes's Starvation Corner and gloomy views, together with scenarios suggesting the need of unilateral adjustments. Keynes's Temptation is used to analyse views stating that global imbalances are sustainable due either to the working of market mechanisms, related to the strength of the American economy, or to the (tacit) agreement of a revived Bretton Woods system. The parallel with Keynes's Justice leads to consider views highlighting shared responsibilities for the imbalances and prompting for collective actions to reduce them.

Globalization and Imbalances in Historical Perspective

Global imbalances associated with the U.S. current account deficit have given rise to speculation about the nature of the impending adjustment: Will it be smooth and gradual, or will it be sudden and costly? This paper summarizes the two views and then considers three historical periods with similar pressures--an earlier era of globalization from 1870 to 1914, the interwar gold standard, and Bretton Woods. A comparison of the periods and their outcomes suggests current global imbalances might resolve themselves quietly.

Fiscal Policy and the Exchange Rate: Current Account Nexus

By using a simple intertemporal model of the current account, I show that the exchange rate elasticity of the trade balance would ceteris paribus be smaller for countries with higher government spending ratios (relative to GDP) and with more limited scope for private consumption smoothing. This finding may have important implications for the design of adjustment programs and for resolving current global imbalances. It could also help explain and reconcile mixed empirical findings on trade elasticities.

Risk and Asian Exchange Rate Regimes

A panel regression gives evidence that more flexibility in Asian exchange rates reduces risk associated with bank borrowing abroad, but deviations from mean exchange rates, and from the renminbi, increase risk. Since the exchange rate regime affects bank behavior and the incentives to hedge, the results broadly support the bank run over the moral hazard view of twin banking and currency crisis. The results suggest that flexibility in exchange rates is required for Asian EMEs, but the flexibility has to be limited, and it depends on more flexibility in the renminbi. This has implications for current global imbalances in reserves and feasible adjustment paths.

Risk and Asian Exchange Rate Regimes

A panel regression gives evidence that more flexibility in Asian exchange rates reduces risk associated with bank borrowing abroad, but deviations from mean exchange rates, and from the renminbi, increase risk. Since the exchange rate regime affects bank behavior and the incentives to hedge, the results broadly support the bank run over the moral hazard view of twin banking and currency crisis. The results suggest that flexibility in exchange rates is required for Asian EMEs, but the flexibility has to be limited, and it depends on more flexibility in the renminbi. This has implications for current global imbalances in reserves and feasible adjustment paths.