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Financial turmoil and global imbalances: the end of Bretton Woods II?

  • Chris Hunt

    (Reserve Bank of New Zealand)

Registered author(s):

    Since August 2007, the global economy has been subject to a sharp and adverse financial shock, with re-pricing of risk and higher cost of funds. This article argues that this shock is a consequence of an unsustainable period of global economic growth involving very large external imbalances. These imbalances – large current account surpluses in many emerging markets matched by current account deficits (CADs) in a number of advanced economies – contributed to an unsustainable cheapening of credit and increased risk-seeking behaviour by financial markets. The development of the imbalances can be explained by financial underdevelopment in many emerging markets, together with particular savings and investment dynamics across the surplus and deficit countries. These factors established ‘Bretton Woods II’, a global macro-financial dynamic that tied the deficit and surplus economies together in a co-dependent relationship. The current credit crisis appears to mark the limits of this relationship. However, the precise nature of any subsequent adjustment in global imbalances is not immediately clear.

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    File URL: http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2008/2008sep71_3hunt.pdf
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    Article provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.

    Volume (Year): 71 (2008)
    Issue (Month): (September)
    Pages:

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    Handle: RePEc:nzb:nzbbul:september2008:6
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    1. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2008. "Will Subprime be a Twin Crisis for the United States?," NBER Working Papers 13978, National Bureau of Economic Research, Inc.
    2. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2004. "The US Current Account Deficit and Economic Development: Collateral for a Total Return Swap," NBER Working Papers 10727, National Bureau of Economic Research, Inc.
    3. Jesmin Rahman, 2008. "Current Account Developments in New Member States of the European Union; Equilibrium, Excess, and EU-Phoria," IMF Working Papers 08/92, International Monetary Fund.
    4. Sebastian Edwards, 2005. "The end of large current account deficits : 1970-2002 : are there lessons for the United States?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 205-268.
    5. Aizenman, Joshua & Sun, Yi, 2008. "Globalization and the Sustainability of Large Current Account Imbalances: Size Matters," Santa Cruz Department of Economics, Working Paper Series qt2bs193w4, Department of Economics, UC Santa Cruz.
    6. 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.
    7. Martin Feldstein, 2008. "Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 113-25, Summer.
    8. Anella Munro & Rishab Sethi, 2007. "Understanding the New Zealand current account: A structural approach," Reserve Bank of New Zealand Discussion Paper Series DP2007/10, Reserve Bank of New Zealand.
    9. Marcus Miller & Lei Zhang, 2007. "Fear and Market Failure: Global Imbalances and “Self-Insurance”," Research Department Publications 4498, Inter-American Development Bank, Research Department.
    10. Sebastian Edwards, 2007. "On Current Account Surpluses and the Correction of Global Imbalances," NBER Working Papers 12904, National Bureau of Economic Research, Inc.
    11. Thierry Bracke & Matthieu Bussière & Michael Fidora & Roland Straub, 2008. "A framework for assessing global imbalances," Occasional Paper Series 78, European Central Bank.
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