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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. Alan Ahearne & Yung Chul Park & William R. Cline & Jean Pisani-Ferry & Kyung Tae Lee & John Williamson, 2007. "Global imbalances: time for action," Policy Briefs 35, Bruegel.
    2. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade, EconWPA 0012003, EconWPA.
    3. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International financial adjustment," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
    4. Ricardo J. Caballero, 2006. "On the Macroeconomics of Asset Shortages," NBER Working Papers 12753, National Bureau of Economic Research, Inc.
    5. 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, Elsevier, vol. 28(6), pages 683-694, September.
    6. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 3993, July.
    7. 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.
    8. 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, Board of Governors of the Federal Reserve System (U.S.) 827, Board of Governors of the Federal Reserve System (U.S.).
    9. Ricardo Hausmann and Federico Sturzenegger, 2006. "Global imbalances or bad accounting? The missing dark matter in the wealth of nations," Business School Working Papers, Universidad Torcuato Di Tella globalimbal, Universidad Torcuato Di Tella.
    10. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
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    Cited by:
    1. 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).
    2. Makin, Anthony J. & Narayan, Paresh Kumar, 2008. "Have US external imbalances been determined at home or abroad?," Economic Modelling, Elsevier, Elsevier, vol. 25(3), pages 520-531, May.
    3. Fracasso, Andrea & Schiavo, Stefano, 2009. "Global imbalances, exchange rates adjustment and the crisis: Implications from network analysis," Journal of Policy Modeling, Elsevier, Elsevier, vol. 31(5), pages 601-619, September.
    4. Célestin Monga, 2012. "The Hegelian dialectics of global imbalances," The Journal of Philosophical Economics, Bucharest Academy of Economic Studies, The Journal of Philosophical Economics, Bucharest Academy of Economic Studies, The Journal of Philosophical Economics, vol. 6(1), November.
    5. Ravi Balakrishnan & Volodymyr Tulin & Tamim Bayoumi, 2007. "Globalization, Gluts, innovation or Irrationality," IMF Working Papers 07/160, International Monetary Fund.

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