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Macroeconomic Imbalances in the World Economy

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  • Roe, Terry L.
  • Shane, Mathew
  • Heerman, Kari

Abstract

This paper explores the emergence of large current account imbalances in a few large countries, the factors behind the emergence, the role of those imbalances in the financial crisis of 2008-09, and the implications of achieving global balance. Imbalances reflect a country’s net savings and suggest that growth in GDP of a surplus country is partly dependent upon growth in external demand of deficit countries. Although a country can incur a surplus or deficit for ever, we suggest that the increasing surpluses of relatively large and rapidly growing countries is likely to be destabilizing to global growth in the long-run. The adjustment will likely require a surplus country, such as China, to rely more on domestic demand for growth while a deficit country, such as the U.S., may need to rely more on external demand for growth. We suggest the Eurozone imbalances are not directly linked to U.S. imbalances. There are a variety of potential causes of global imbalances including excess savings in surplus countries, the twin deficit hypothesis, the export-led growth hypothesis, and the possible miss-measurement of the U.S. current account due to repatriation of profits from U.S. owned foreign affiliates. However, whatever the combination of causes of the growing imbalances, adjustments need to be made to return to long-terms sustainable growth.

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Bibliographic Info

Paper provided by University of Minnesota, Center for International Food and Agricultural Policy in its series Working Papers with number 109244.

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Date of creation: Jul 2011
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Handle: RePEc:ags:umciwp:109244

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Keywords: International Relations/Trade;

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  1. Bems, Rudolfs & Dedola, Luca & Smets, Frank, 2007. "US Imbalances: The Role of Technology and Policy," CEPR Discussion Papers 6110, C.E.P.R. Discussion Papers.
  2. Ellen R McGrattan & Edward C Prescott, 2008. "Technology Capital and the U.S. Current Account," Levine's Bibliography 122247000000001827, UCLA Department of Economics.
  3. Caballero, Ricardo J & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," Center for International and Development Economics Research, Working Paper Series qt7xc0g8mm, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  4. David Backus & Espen Henriksen & Frederic Lambert & Christopher Telmer, 2009. "Current Account Fact and Fiction," NBER Working Papers 15525, National Bureau of Economic Research, Inc.
  5. Robert E. Lipsey, 2009. "Measuring International Trade in Services," NBER Chapters, in: International Trade in Services and Intangibles in the Era of Globalization, pages 27-70 National Bureau of Economic Research, Inc.
  6. Ricardo J. Caballero & Arvind Krishnamurthy, 2009. "Global Imbalances and Financial Fragility," NBER Working Papers 14688, National Bureau of Economic Research, Inc.
  7. Judith A. Giles, & Cara L. Williams, 1999. "Export-led Growth: A Survey of the Empirical Literature and Some Noncausality Results," Econometrics Working Papers 9901, Department of Economics, University of Victoria.
  8. Mayer-Foulkes David A, 2010. "Long-Term Fundamentals of the 2008 Economic Crisis," Global Economy Journal, De Gruyter, vol. 9(4), pages 1-25, January.
  9. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, 09.
  10. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves," IMF Working Papers 05/198, International Monetary Fund.
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