We argue that a chronic US current account deficit is an integral and sustainable feature of a successful international monetary system. The US deficit supplies international collateral to the periphery. International collateral in turn supports two-way trade in financial assets that liberates capital formation in poor countries from inefficient domestic financial markets. The implicit international contract is analogous to a total return swap in domestic financial markets. Using market-determined collateral arrangements from these transactions we compute the collateral requirements consistent with recent foreign direct investment in China. The data are remarkably consistent with such calculations. The analysis helps explain why net capital flows from poor to rich countries and recent evidence that net outflows of capital are associated with relatively high growth rates in emerging markets. It also clarifies the role of the reserve currency in the system.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10727.
Length: Date of creation: Sep 2004 Date of revision: Handle: RePEc:nbr:nberwo:10727
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Find related papers by JEL classification: F2 - International Economics - - International Factor Movements and International Business F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
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Ramon Moreno, 2005.
"Motives for intervention,"
BIS Papers chapters,
in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 4-18
Bank for International Settlements.
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