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Global Imbalances, Risk, and the Great Recession

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Abstract

This paper describes a new analytical framework for the quantitative assessment of international external positions. The framework links each country's current net foreign asset position to its current trade flows, forecasts of future trade flows, and expectations concerning future returns on foreign assets and liabilities in an environment where countries cannot run Ponzi schemes or exploit arbitrage opportunities in world financial markets. It provides guidance on how external positions should be measured in the data, and on how the sustainability of a country's current position can be assessed. To illustrate its usefulness, I study the external positions of 12 countries (Australia, Canada, China, France, Germany, India, Italy, Japan, South Korea, Thailand, The United States and The United Kingdom) between 1970 and 2011. In particular, I examine how changes in the perceived risk associated with future returns across world financial markets contributed to evolution of external positions before the 2008 financial crisis, and during the ensuing Great Recession.

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  • Martin Evans, 2013. "Global Imbalances, Risk, and the Great Recession," Working Papers gueconwpa~13-13-07, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~13-13-07
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    1. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
    2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
    3. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    4. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2012. "External adjustment and the global crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 252-265.
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    6. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    7. Gruber, Joseph W. & Kamin, Steven B., 2007. "Explaining the global pattern of current account imbalances," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 500-522, June.
    8. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-271, February.
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    More about this item

    Keywords

    Global Imbalances; Foreign Asset Positions; Current Accounts; International Debt; International Solvency; Great Recession;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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