This paper discusses two opposing views on global imbalances: The "traditional view", which regards the imbalances as a threat to global economic and financial stability, and the "new paradigm" view, which considers that they are the natural consequence of economic and financial globalization. In terms of their policy implications, the traditional view focuses on monetary and fiscal policy decisions in the United States that need to be urgently reversed to avoid an abrupt unwinding of the imbalances involving a sell-off of dollar assets, a sharp increase in U.S. interest rates, and a hard landing for the global economy. By contrast, the new paradigm view considers that the imbalances will be resolved smoothly through the normal functioning of markets. The paper argues that an abrupt unwinding of imbalances is highly unlikely and advances a number of arguments in support of the new paradigm view.
Crafting stimulus packages and financial bailouts to address immediate problems has for many reasons been a priority for policymakers. In this Council Special Report, however, Steven Dunaway argues that policymakers must go beyond these steps and tackle one of the root causes of today's crisis: imbalances between savings and investment in major countries. The report analyzes the nature of these imbalances, which occur when some countries, such as the United States, run large current account (essentially trade) deficits while others, such as China, maintain large surpluses. Dunaway identifies three features of the international financial system that have allowed the imbalances to persist, features that involve both floating and managed exchange rates as well as the issuance of reserve assets. In particular, he notes that the United States' status as an issuer of such assets has enabled it to finance a current account deficit. The report then prescribes a variety of steps to address global imbalances. Beyond stimulus packages around the world, it urges measures to raise savings (principally government savings) in the United States, reform labor and product markets in Europe and Japan to increase competition and flexibility, and boost domestic consumption in China. Finally, the report advocates improving International Monetary Fund (IMF) surveillance of member states' economic policies by reducing the role of the Fund's executive board and depoliticizing the selection of its senior management.
This book is a masterpiece. It combines a clear historical analysis of issues and causes of past international instability with a contemporary discussion of how to avoid future occurrences. It is a very informative book that caters to the need of the savvy and the uninformed. It reviews in a rigorous manner the core obstacles to achieving a durable global financial stability. The presentation is clear, simple and well organised. . . Saccomanni demonstrated a great understanding of monetary and financial matters. The book could not have been better timed given the deepening recession caused by the global financial meltdown. I am very delighted to recommend it. Chika B. Onwuekwe, Journal of International Banking Law and Regulation . . . the timing of this publication could not have been better, Fabrizio Saccomanni provides the reader with a well-written analytical and historical survey of the causes and consequences of international financial crisis and possible solutions. . . the book is enjoyable, compendious and concise. . . the book is worth reading by anyone who is interested in understanding the global financial system and is looking for a critical appraisal of its performance. In particular, students and academics of international economics can get a good overview on the issue of international financial stability, since the book bridges the gap between theoretical models and practical policy implications. . . Saccomanni s book is a well-written and valuable contribution to the debate as already said before the timing of its publication could hardly be better. Ralf Fendel, Journal of Economics and Statistics Recurrent instability has characterized the global financial system since the 1980s, eventually leading to the current global financial crisis. This instability and the resultant disruptions sovereign debt defaults, exchange rate misalignments, financial market illiquidity and asset price bubbles are linked, in this book, to the shortcomings of the global financial system which tends to generate cycles of boom and bust in credit flows. These cycles are set in motion by the monetary impulses of major industrial countries and are amplified and propagated through the operation of global financial markets. Fabrizio Saccomanni argues that to counter such systemic instability requires that national authorities give adequate weight to financial stability objectives when formulating their monetary and regulatory policies. He maintains that appropriate multilateral strategies to deal with unsustainable trends in credit aggregates and asset prices should be devised in the International Monetary Fund in the context of a strengthened framework to deal with global payments imbalances and exchange rate misalignments. Providing a comprehensive historical and analytical survey of the causes, consequences and possible cures of international financial instability, this book will be of great interest to students and academics of international economics and finance. It will also appeal to financial market participants and analysts, government officials and central bankers as a comprehensive survey of the relevant academic literature and of the state of the policy debate.
In the past ten years, huge economic imbalances among US-Asia as well as eurozone countries have built up which have led to numerous crisis situations. Thus, the goal of this book is to find out if economic imbalances are sustainable or if they need to be rebalanced? What role do distinct national policies play? The author is going to compare the imbalances of US-China with the intra-euro imbalances of Germany, Spain and Italy. Firstly, the historical development of the economic imbalances is presented in order to point out the unprecedented height of the mentioned imbalances. Furthermore, the author is analyzing the causes of imbalances by presenting the development of the competitiveness, the saving-/investment rates, the financial markets as well as the different national policies. It is shown that distinct national policies were the underlying causes for the development of such high economic imbalances. After having seen the historical development as well as the causes, the author describes the possible costs and benefits of having imbalances as well as the implications of the global financial crisis and the current European crisis. Due to the increasing globalization, the financial crisis spread fast and led to huge losses and decreasing investor’s trust in European countries. This resulted in the European crisis which subsequently could also endanger the global economy. Because of the huge crisis’ impact, traditional and alternative balancing channels are also compared. Despite supporting measures such as restrictive fiscal policies and financial assistance, Europe is still suffering from an economic downturn whereas the US returned to a slow economic recovery. At the end, the author concludes that global imbalances need to be rebalanced in order not to avoid reaching an unsustainable level. The occurring as well as rebalancing of economic imbalances highly depends on distinct national policies. Unless the international coordination and cooperation increases, economic imbalances will continue to occur and will lead to economic crises when reaching an unsustainable level.
This new Geneva Report examines the main threats to international financial stability, focusing on the implications of major changes that have occurred in the global financial system in the past two decades.
The book would be a good companion text for an undergraduate class in international finance or open-economy macroeconomics. Catherine L. Mann, Journal of Economic Literature Untangling the US Deficit is a unique and well-researched book and will be of great interest to academic economists and postgraduates. Policymakers, business and market economists will also find it an enlightening and challenging analysis. sirreadalot.org The book is written in a very accessible fashion, even though the authors strive to accommodate competing and complex views on the causes and cures of the US external deficit, which makes for enjoyable and informative reading. Their reliance on data, charts and bibliography result in persuasive arguments. Recommended. General readers; upper-division undergraduates through practitioners. A. Sharma, Choice What are the causes of the US current account deficit? Are the problems made in the US or the rest of the world? Are these deficits sustainable, at what level? These are the types of questions the authors set out to answer, and in essence conclude that the answers do not matter for global stability as long as imbalances are left to market forces and the US can avoid large net income outflows. The beauty of this book, however, is watching the authors (the unusual combination of a business economist and an academic economist) arrive at this conclusion. They provide insights that can come only from years of practical and theoretical experience. William E. Becker, Indiana University Bloomington, US As the US current account deficit has expanded to a record level of $811 billion in 2006, debate about the deficit s causes and consequences has also grown. Is the deficit a product of American profligacy or a glut of savings in the rest of the world? Is it a serious problem or essentially benign? Untangling the US Deficit charts a course between the competing explanations in a systematic and rigorous approach, incorporating the latest academic research and market data. Particular attention is given to the China United States trade imbalance and to the special role of the US dollar and US capital markets in global finance. This unique and well-researched book will be of great interest to academic economists and postgraduates. Policy-makers, business and market economists will also find it to be an enlightening and challenging account.
Consider two views of the global financial crisis. One view looks across the border: it blames external imbalances, the unprecedented current account deficits and surpluses in recent years. Another view looks within the border: it faults domestic financial systems where risks originated in excessive credit booms. We can use the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. The credit boom explanation is the most plausible predictor of crises since the late nineteenth century; global imbalances have only a weak correlation with financial distress compared to indicators drawn from the financial system itself.
This volume presents papers from a conference organized by the Korea Development Institute and the IMF. The purpose of this high-level conference was for policymakers and academics from the Asian region and from G-20 countries to discuss forward-looking economic and financial issues of interest to the international community, such as restoring normalcy to fiscal policy, macroprudential regulation, the future of the financial system, global fiscal imbalances, and the international monetary system. Topics include: (1) A strategy for renormalizing fiscal and monetary policies in advanced economies. Key principles for restoring financial stability in the wake of the crisis, including the timing and sequence for exit, are identified. (2) Rethinking macroeconomic policy. This section examines if and how macroeconomic policy should respond to sectoral imbalances and asset-price and housing imbalances, as well as a potential role for macroprudential regulation. (3) Redesigning the financial system of the future. Responses by both policymakers and the private sector to recent events are evaluated in terms of how they will shape the future financial system and its role in the global economy. (4) Global imbalances. The argument is made that there is an urgent need to address the domestic and international distortions that are a key cause of imbalances; failure to do so would threaten the sustainability of the recovery. (5) The future of the international monetary system. Steps that can be taken to address the inherent weaknesses in the current system are described, including possible solutions on both the demand side and on the supply side.
Spurred by advances in information and computer technologies, financial liberalization and innovation took off inthe late 1970s. Although the changes in financial markets have been beneficial overall, our understanding of the new risks to financial stability lags behind, as demonstrated by the financial crises of the past couple of decades. The study of international financial stability - a public good - is still in its infancy. This pamphlet, aimed at stimulating further debate on the subject, proposes a definition of financial stability and a broad framework for safeguarding it without inhibiting its dynamic development or limiting its benefits.
