Global imbalances, saving glut, money, credit, capital flows, current account, interest rates, financial crisis. This is a three part series looking at global imbalances. Global imbalances rigidities designed to highlight the heterogeneous relative demand for and supply of nancial assets across di erent regions of the world. Global imbalances mutate at the zero lower bound zlb from benign to malign. Global imbalances and policy wars at the zero lower bound, nber working papers 21670, national bureau of economic research, inc. An alternative perspective on global imbalances and. Hence, if the current account is persistently showing deficits for certain period it is said to show an. Away from the zlb, safe asset scarcity propagates low equilibrium real interest rates via current account surpluses. Global imbalances and the financial crisis note abstract in this paper, i consider the relationship between factors that caused the global imbalances of 1997 2006 and the current financial crisis. A historical perspective on the importance of rules. Jul 28, 2017 and the continued reliance on demand from debtor countries risks derailing the global recovery, while raising the chances of a disruptive adjustment down the road. Cambridge, mass national bureau of economic research, october. Global imbalances and currency wars at the zlb ricardo caballero emmanuel farhi pierreolivier gourinchas suerfpsecepii, paris, september 2016. This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities.
Global imbalances and currency wars at the zlb by caballero. Global imbalances and currency wars at the zlb ideasrepec. Global imbalances there is compelling evidence about the fact that global imbalances, in terms of large current account deficits and surpluses in different countries, tend to produce bubbles, and. Global imbalances and currency wars at the zlb ricardo j. True, if some shock such as a rise in foreign demand were to close up the global imbalances absent any concomitant weaknesses, the damage might well be contained to exchange rates and to the collapse of a few large banks and financial firms along with. Global imbalances and policy wars at the zero lower bound ricardo j. The economists latest solutionssuch as the global currency called the sdrpresent hidden new dangers while resolving none of the current dilemmas. The figure reports lnee2007m1 where e denotes the foreign currency value of the dollar. We observe the buildup of global imbalances in the early 2000s, until the. We characterize global imbalances at the zlb with a metzler diagram in quantities that connects the size of the global recession and net foreign asset positions and current accounts to the recessions that would. In the not so recent past, such imbalances were addressed through various gold standard systems. The international adjustment process is starting to work a. Global current account imbalances and exchange rate. Thus, our model speaks to the debates surrounding currency wars.
Jan, 2020 currency wars lower export prices and spur economic growth. Hence, if the current account is persistently showing deficits for certain period it is said to show an inequilibrium. Prima facie, the imbalances seem a significant problem. A previous version of this paper was circulated under the title.
The aim of the section is to provide some insight on how the different opinions of american economists on global. Away from the zlb, current account surpluses propagate low interest rates from the origin country to the rest of the world. Global imbalances and currency wars at the zlb, working paper 344401, harvard university openscholar. At the zlb, safe asset scarcity propagates recessions via current account sur pluses. Part 2 will look at the future of these imbalances and the likelihood that. Global imbalances and currency wars at the zlb by caballero, farhi, gourinchas author. Global imbalances and currency wars at the zlb, 2016 meeting papers 1418, society for economic dynamics.
Real interest rates, imbalances and the curse of regional save asset. In all these cases, it would be unwise to want to reduce imbalances. Global imbalances, organized by iie washington 8 february 2007 introduction this paper discusses global imbalances from chinas perspective. Global imbalances, financial crisis and economic recovery g. First, the dollar is the currency of choice for trade invoicing, international security. The last part of our analysis focuses on safe assets providers. The monetarist position the theory of monetarism, developed by the economist milton friedman, has its main focus on the macroeconomic effect of the supply of money and central banking. March 10, 2016 abstract this paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. The exchange rate becomes indeterminate but plays a crucial role in both the distribution and the magnitude of output. This column summarises the variety of explanations of the relationship between imbalances and the crisis. Global imbalances and currency wars at the zlb, nber working paper series 21670.
The debate on trade wars and currency wars has reemerged since the great recession of 2009. Paper on global imbalances and currency wars at the zlb. But while much of the book does indeed focus on competitive devaluation, what currency wars really boils down to is james rickards love affair with the gold standard, and, to a lesser extent, his libertarian values and pride in murica a. One longerterm problem that continues to haunt the prospects for a sustained recovery is the large. At the zlb, current account surpluses propagate recessions. Pdf the greek crisis and the austerity controversy in europe. Given these risks, addressing external imbalances in a way that is supportive of global growth is a shared responsibility. March 11, 2016 abstract this paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. In the wake of the financial crisis, many observers and policymakers have singled them out as a key factor contributing to the turmoil bernanke 2009, economist 2009, king 2010, krugman 2009, and portes 2009.
Pierreolivier gourinchas, university of california, berkeley lead discussant. Global imbalances and policy wars at the zero lower bound nber. The making of the next global crisis paperback august 28, 2012. Caballero, emmanuel farhi, and pierreolivier gourinchas at the conference, international monetary stability. Jul 26, 2011 global currentaccount imbalances have been at the forefront of policy debates. Ito and mccauley, currency zones rescaling global imbalances. The making of the next global crisis is ostensibly that. Currency wars provides a decent history of monetary policy, and an ample divination of what could come if decent policy is not implemented, and mistakes of the past are not learned from. The only criticism i have of currency wars is the opening. Assume now that the world is in a global liquidity trap rw 0. Liquidity and safety traps, safe assets, global recession, currency wars, trade wars, current account, capital flows, reserve currency, secular stagnation, public debt, fiscal policy, balanced budget global imbalances and currency wars at the zlb.
Asset pricing, economic fluctuations and growth, international finance and macroeconomics, monetary economics. Caballero emmanuel farhi pierreolivier gourinchas this draft. Monetary policies and exchange rates at the zero lower bound. We thank chris ackerman, mark aguiar, manuel amador, cristina arellano, olivier blanchard, luca fornaro, jordi gali, gita gopinath, nobuhiro. Caballero, emmanuel farhi, pierreolivier gourinchas. Global imbalances and currency wars at the zlb duration. The graph shows current account balances as a fraction of world gdp. This paper makes a case that the global imbalances of the 2000s and the recent global financial crisis are intimately connected. Given the nominal rigidities, output is aggregatedemand determined as soon as the global demand for nancial assets exceeds their supply at the zlb. Global imbalances and currency wars at the zero lower bound. Pdf the main aim of this article is to identify factors influencing the direction of change.
Discuss informally whether there is a unique equilibrium in terms of the home and foreign output gaps. Caballero, emmanuel farhi, and pierreolivier gourinchas nber working paper no. Currency wars yesterday and today milan brahmbhatt, otaviano canuto, and swati ghosh an energetic debate on the danger of a global currency war has flared up in recent months, stoked by a renewed move to quantitative easing in the united states, resurgent capital flows to developing countries and strong upward pressure on. Recent developments and prospects, speech delivered at the bundesbank lecture, berlin, germany, september 11. Past, present and future, hoover institution, may 5 2016. Global imbalances and policy wars at the zero lower bound. Chapter four the fundamental structure of the international. For some countries this works just fine, notably the united states and britain, but for the majority of countries. In 2010, currency wars between the united states and china resulted in higher food prices. The mainforms of such currency wars in contemporary global economy have been.
This is analogous to the analysis away from the zlb, where the world equilibrium real interest rates and net foreign asset and current account positions are. March 11, 2016 abstract this paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but. Currency wars takes us on a whirlwind global tour from peking to moscow to dubai, where governments and even everyday citizens are already hedging themselves against a declining u. Gourinchas, the safe assets shortage conundrum, journal of economic perspectives 31 summer 2017.
At present, the us is faced with sizable deficits on both its budget the excess of government spending over revenues and its current account the excess of what americans spend on goods, services and funds transferred abroad. Since then, global imbalances have receded but not disappeared. Global imbalances and currency wars at the zlb, nber working paper no. Adjusted for inflation, the price was the lowest since 1973. It is nonpartisan, open to the examination of diverse points of view, and dedicated to public service.
University of california at berkeley department of economics. Sadly, most americans are completely unaware of the dangers surrounding them and are still just hoping for the best. Global imbalances and currency wars at the zlb ens. This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital. Both have their origins in economic policies followed in a number. May 06, 2016 global imbalances i gave some comments on global imbalances and currency wars at the zlb, by ricardo j.
Global current account imbalances and exchange rate adjustments. Global imbalances and currency wars at the zlb san francisco fed. We characterize global imbalances at the zlb in terms of a metzler diagram in quantities. Among the new dangers are threats not just to americas economic wellbeing but to our national security as well. They reflect the optimal allocation of capital across time and space. Global imbalances and currency wars at the zlb emmanuel. Part 1 highlights the build up in imbalances and what effect the global financial crisis has had. Federal reserve board the new normal and what it means. Current account deficit, speech delivered at the sandridge lecture, virginia association of economists, richmond, va. John cochrane, hoover institution, stanford university 1. Global imbalances and policy wars at the zero lower bound by. In theory, when the current account is in balance, it has a zero value.
I ask what should and can be done to dampen global imbalances in the future. Acute global safe asset scarcity forces the economy into a global safety trap. Away from the zlb, net safe asset suppliers enjoy a premium. Global output endogenously declines, reducing income and therefore net global asset demand, and restoring equilibrium in global asset markets. Explain what drives global imbalances outside the zlb. But imbalances can be symptoms of underlying distortions, or be dangerous by themselves. E0,f3,f4,g01 abstract this paper explores the consequences of extremely low equilibrium real interest rates in a world with. That exchange rates are disconnected from macroeconomics in general and current accounts in particular puzzles economists obstfeld and rogoff 2001. By the same token, the indeterminacy implies that if agents coordinate on an appreciated. Global imbalances refers to the situation where some countries have more assets than the other countries.