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How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?

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  • Francis E. Warnock
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    Abstract

    Partly reflecting structural advantages such a liquidity and strong investor protection, foreigners have built up extremely large positions in U.S. (as well as other dollar-denominated) financial assets. This paper describes the impact on global wealth of an unanticipated shock to U.S. financial markets. For every 10 percent decline in the dollar, U.S. equity markets, and U.S. bond markets, total wealth losses to foreigners could amount to about 5 percentage points of foreign GDP. Four stylized facts emerge: (i) foreign countries, particularly emerging markets, are more exposed to U.S. bonds than U.S. equities; (ii) U.S. exposure has increased for most countries; (iii) on average, U.S. asset holdings of developed countries and emerging markets (scaled by GDP) are very similar; and (iv) based on their reserve positions, wealth losses of emerging market governments could, on average, amount to about 2¾ percentage points of their GDP.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/170.

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    Length: 28
    Date of creation: 01 Jul 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/170

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    References

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    1. Francis E. Warnock & Veronica C. Warnock, 2005. "International Capital Flows and U.S. Interest Rates," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp103, IIIS.
    2. Kho, Bong-Chan & Stulz, Rene M. & Warnock, Francis E., 2006. "Financial Globalization, Governance, and the Evolution of the Home Bias," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2006-12, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    3. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(4), pages 467-492, August.
    4. Philip R. Lane, 2006. "Global Bond Portfolios and EMU," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
    5. William Goetzmann & Lingfeng Li & K. Rouwenhorst, 2001. "Long-Term Global Market Correlations," Yale School of Management Working Papers, Yale School of Management ysm237, Yale School of Management, revised 01 Jan 2008.
    6. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number clar06-2.
    7. Burger, John D. & Warnock, Francis E., 2007. "Foreign participation in local currency bond markets," Review of Financial Economics, Elsevier, Elsevier, vol. 16(3), pages 291-304.
    8. Gagnon, Joseph E., 2009. "Currency crashes and bond yields in industrial countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(1), pages 161-181, February.
    9. Francis E. Warnock & Veronica C. Warnock, 2005. "International capital flows and U.S. interest rates," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 840, Board of Governors of the Federal Reserve System (U.S.).
    10. Cedric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 9(Jan).
    11. Philip Lane & Gian Maria Milesi-Ferretti, 2005. "The International Equity Holdings of Euro Area Investors," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp104, IIIS.
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    Cited by:
    1. Fratzscher, Marcel, 2007. "US shocks and global exchange rate configurations," Working Paper Series, European Central Bank 0835, European Central Bank.
    2. Philip R. Lane & Jay C. Shambaugh, 2010. "Financial Exchange Rates and International Currency Exposures," American Economic Review, American Economic Association, American Economic Association, vol. 100(1), pages 518-40, March.
    3. Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(8), pages 1390-1407, December.
    4. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "Europe and global imbalances," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 22, pages 519-573, 07.
    5. Matthew Higgins & Thomas Klitgaard & Cédric Tille, 2006. "Borrowing without debt? Understanding the U.S. international investment position," Staff Reports, Federal Reserve Bank of New York 271, Federal Reserve Bank of New York.

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