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Global Imbalances: Time for Action

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  • Alan Ahearne
  • William R. Cline

    ()
    (Peterson Institute for International Economics)

  • Kyung Tae Lee
  • Yung Chul Park
  • Jean Pisani-Ferry
  • John Williamson

    ()
    (Peterson Institute for International Economics)

Abstract

The world economy faces a grave danger from the large imbalances in current account positions. Policymakers should not wait until financial markets force global adjustment. They should initiate a credible, comprehensive adjustment program to reduce the risks of a crisis, which could produce a world recession and disruptions to the global trading system. Participants in a February 2007 workshop, held in Washington and sponsored by Brussels-based Bruegel, Seoul-based Korea Institute for International Economic Policy, and Washington-based Peterson Institute for International Economics, outlined how an orderly reduction in global imbalances can be achieved. They presented estimates of the exchange rate implications of current account adjustment scenarios in which the US current account deficit narrowed to 3 percent of GDP in the medium term and the world growth rate was unchanged. Most of the adjustment would be borne by China, Japan, other Asian economies, a few high-surplus European economies not in the euro area, and the oil-exporting countries. The combined role of the smaller surplus economies in Asia and Europe (outside of the euro area) in the adjustment process will be more important than the role of either China or Japan. The adjustment would require a rebalancing of world demand with both higher saving in the United States and higher consumption in East Asia, as well as effective appreciations of the currencies of China, Japan, and other surplus countries in East Asia and Europe and bilateral appreciations against the dollar by other currencies. The problem is multilateral in nature and needs to be addressed in a multilateral context such as that potentially provided by the International Monetary Fund.

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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB07-4.

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Date of creation: Mar 2007
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Handle: RePEc:iie:pbrief:pb07-4

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Cited by:
  1. Smith, Constance, 2011. "External Balance Adjustment: An Intra-National and International Comparison," Working Papers 2011-13, University of Alberta, Department of Economics.
  2. Jean Pisani-Ferry, 2008. "The end of Europe's longstanding indifference to the renminbi," Policy Contributions 263, Bruegel.
  3. Pedro BAÇÃO & António Portugal DUARTE & Mariana SIMÕES, 2013. "The International Monetary System in Flux: Overview and Prospects," Chapters of Financial Aspects of Recent Trends in the Global Economy book, in: Rajmund Mirdala (ed.), Financial Aspects of Recent Trends in the Global Economy, volume 1, chapter 10, pages 192-206 ASERS Publishing.
  4. Nabil Aflouk & Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2011. "Exchange Rate Misalignments and World Imbalances: a FEER Approach for Emerging Countries," Post-Print halshs-00484808, HAL.
  5. Jérémie Cohen-Setton & Jean Pisani-Ferry, 2008. "Asia-Europe: The Third Link," Working Papers 44, Bruegel.
  6. Robert Lafrance, 2008. "China's Exchange Rate Policy: A Survey of the Literature," Discussion Papers 08-5, Bank of Canada.
  7. Xafa, Miranda, 2007. "Global imbalances and financial stability," Journal of Policy Modeling, Elsevier, vol. 29(5), pages 783-796.
  8. Avellaneda, Maria Belen, 2008. "The Transatlantic Economy Dollar vs Euro relations amid the Global Financial Crisis," MPRA Paper 22362, University Library of Munich, Germany, revised 30 Dec 2008.
  9. Saadaoui, Jamel, 2012. "Déséquilibres globaux, taux de change d’équilibre et modélisation stock-flux cohérente
    [Global Imbalances, Equilibrium Exchange Rates and Stock-Flow Consistent Modelling]
    ," MPRA Paper 51332, University Library of Munich, Germany.
  10. Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2010. "Exchange Rate Misalignments at World and European Levels: a FEER Approach," Economie Internationale, CEPII research center, issue 121, pages 25-58.
  11. Miranda Xafa, 2007. "Global Imbalances and Financial Stability," IMF Working Papers 07/111, International Monetary Fund.

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