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A framework for assessing global imbalances

  • Thierry Bracke
  • Matthieu Bussière
  • Michael Fidora
  • Roland Straub

In this paper, we take a systematic look at global imbalances. First, we provide a definition of the phenomenon, and relate global imbalances to widening external positions of systemically important economies that reflect distortions or entail risks for the global economy. Second, we provide an operational content to this definition by measuring trends in external imbalances over the past decade and putting these in a historical perspective. We argue that three main features set today’s situation apart from past episodes of growing external imbalances - (i) the emergence of new players, in particular emerging market economies such as China and India, which are quickly catching up with the advanced economies; (ii) an unprecedented wave of financial globalisation, with more integrated global financial markets and increasing opportunities for international portfolio diversification, also characterised by considerable asymmetries in the level of market completeness across countries; and (iii) the favourable global macroeconomic and financial environment, with record high global growth rates in recent years, low financial market volatility and easy global financing conditions over a long time period of time, running at least until the summer of 2007. Finally, we provide an analytical overview of the fundamental causes and drivers of global imbalances. The central argument is that the increase in imbalances has been driven by a unique combination of structural and cyclical determinants. JEL Classification: F2, F32, F33, F41.

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Paper provided by European Central Bank in its series Occasional Paper Series with number 78.

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Length: 51 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:ecb:ecbops:20080078
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