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Global Imbalances and Financial Stability

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  • Miranda Xafa
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    Abstract

    This paper discusses two opposing views on global imbalances: The "traditional view", which regards the imbalances as a threat to global economic and financial stability, and the "new paradigm" view, which considers that they are the natural consequence of economic and financial globalization. In terms of their policy implications, the traditional view focuses on monetary and fiscal policy decisions in the United States that need to be urgently reversed to avoid an abrupt unwinding of the imbalances involving a sell-off of dollar assets, a sharp increase in U.S. interest rates, and a hard landing for the global economy. By contrast, the new paradigm view considers that the imbalances will be resolved smoothly through the normal functioning of markets. The paper argues that an abrupt unwinding of imbalances is highly unlikely and advances a number of arguments in support of the new paradigm view.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/111.

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    Length: 20
    Date of creation: 01 May 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/111

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    Related research

    Keywords: Current account balances; Adjustment process; current account; current account deficit; current account surpluses; central banks; sovereign debt; net debtor; current account adjustments; global liquidity; balance of payments; foreign debt; debt-equity; capital account; reserve bank; current account position; reserve currency; central bank; foreign debts; external debt; investment income;

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    References

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    1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
    2. Pierre-Olivier Gourinchas & Helene Rey, 2005. "International Financial Adjustment," NBER Working Papers 11155, National Bureau of Economic Research, Inc.
    3. McKinnon, Ronald & Schnabl, Gunther, 2006. "Devaluing the dollar: A critical analysis of William Cline's case for a New Plaza Agreement," Journal of Policy Modeling, Elsevier, vol. 28(6), pages 683-694, September.
    4. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
    5. Ricardo J. Caballero, 2006. "On the Macroeconomics of Asset Shortages," NBER Working Papers 12753, National Bureau of Economic Research, Inc.
    6. Ricardo Hausmann and Federico Sturzenegger, 2006. "Global imbalances or bad accounting? The missing dark matter in the wealth of nations," Business School Working Papers globalimbal, Universidad Torcuato Di Tella.
    7. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2005. "Financial market developments and economic activity during current account adjustments in industrial economies," International Finance Discussion Papers 827, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:
    1. Makin, Anthony J. & Narayan, Paresh Kumar, 2008. "Have US external imbalances been determined at home or abroad?," Economic Modelling, Elsevier, vol. 25(3), pages 520-531, May.
    2. Ziesemer, Thomas, 2009. "Growth with imported resources: On the sustainability of U.S. growth and foreign debt," MERIT Working Papers 028, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    3. Fracasso, Andrea & Schiavo, Stefano, 2009. "Global imbalances, exchange rates adjustment and the crisis: Implications from network analysis," Journal of Policy Modeling, Elsevier, vol. 31(5), pages 601-619, September.
    4. Ravi Balakrishnan & Volodymyr Tulin & Tamim Bayoumi, 2007. "Globalization, Gluts, innovation or Irrationality," IMF Working Papers 07/160, International Monetary Fund.

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