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Sovereign external assets and the resilience of global imbalances

Author

Listed:
  • Gabriel Enrique Alberola

    () (Banco de España)

  • José María Serena

    () (Banco de España)

Abstract

Sovereign external assets (SEAs) comprise foreign exchange reserves and sovereign wealth funds (SWFs). The global stock of reserves reached 7 $trn in the second quarter of 2008, but data on SWF are rather elusive. Our estimation puts the SWFs at around 2,5 $trn dollars by 2007 and in the last years they have grown at a high pace, fostered by high commodity prices. Therefore, SEAs have surpassed the 10 $trn mark (around 5% of global assets and 15% of global GDP). This paper argues that reserves and SWF assets should be jointly considered for the assessment of global imbalances. Both are official capital outflows from developing to developed countries, both hinder internal adjustment in current account surplus countries, both help to cover the financing needs of deficit countries, in particular in the US, and, therefore, both contribute to sustain global imbalances. The importance of SEAs in financing the external imbalances of the US has been widely recognised but scantly measured. Our rule-of-thumb calculations suggests that they have greatly increased their importance in the last years, having surpassed the US$ trillion increase in 2007; relative to US financing needs, this amount represents around a 135% and 50% of net and gross needs, respectively, in 2007. Reserves have in the last years contributed 80% and SWFs 20%.Looking ahead, two main conclusions can be put forward: 1) the relative importance SWFs in the financing of the US deficits and global imbalances is set to increase (also relative to reserves), but this is conditional to commodity prices remaining at high levels. On the one hand, the economic motivation of SWFs -intertemporal smoothing- is more palatable than that of reserves (exchange rate management), despite political concerns on SWFs; on the other hand, SWFs do not have significant internal costs, contrary to reserves, whose monetary and fiscal costs are increasing in the margin; 2) SEAs can well buttress US financial needs in the years ahead, providing resilience to the global imbalances. Dramatic shifts in the pace of SEAs accumulation -due for instance to an adjustment of commodity prices- or in the investment allocation would jeopardise these prospects.

Suggested Citation

  • Gabriel Enrique Alberola & José María Serena, 2009. "Sovereign external assets and the resilience of global imbalances," Working Papers 0834, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0834
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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/08/Fic/dt0834e.pdf
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    References listed on IDEAS

    as
    1. Fidora, Michael & Beck, Roland, 2008. "The impact of sovereign wealth funds on global financial markets," Occasional Paper Series 91, European Central Bank.
    2. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2008. "Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 347-368, May.
    3. Roland Beck & Michael Fidora, 2008. "The impact of sovereign wealth funds on global financial markets," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 43(6), pages 349-358, November.
    4. Enrique Alberola & José María Serena, 2007. "Global financial integration, monetary policy and reserve accumulation. Assessing the limits in emerging economies," Working Papers 0706, Banco de España;Working Papers Homepage.
    5. M S Mohanty & Philip Turner, 2005. "Intervention: what are the domestic consequences?," BIS Papers chapters,in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 56-81 Bank for International Settlements.
    6. Romain Ranciere & Olivier D Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries; Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund.
    7. Chhaochharia, Vidhi & Laeven, Luc, 2008. "Sovereign Wealth Funds: Their Investment Strategies and Performance," CEPR Discussion Papers 6959, C.E.P.R. Discussion Papers.
    8. Roland Beck & Michael Fidora, 2008. "The impact of sovereign wealth funds on global financial markets," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 43(6), pages 349-358, November.
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    Cited by:

    1. Pistor, Katharina, 2009. "Global network finance: Institutional innovation in the global financial market place," Journal of Comparative Economics, Elsevier, vol. 37(4), pages 552-567, December.
    2. Maurice Obstfeld, 2009. "2009 International Conference "Financial System and Monetary Policy Implementation," Keynote Speech, Lenders of Last Resort in a Globalized World," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 27(1), pages 35-52, November.
    3. Obstfeld, Maurice, 2009. "Lenders of Last Resort in a Globalized World," CEPR Discussion Papers 7355, C.E.P.R. Discussion Papers.
    4. Enrique Alberola & Aitor Erce & José María Serena, 2012. "International reserves and gross capital flows. Dynamics during financial stress," Working Papers 1211, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

    international reserves; sovereign wealth funds; global imbalances; exchange rates;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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