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Global imbalances – where are they and do they matter?
William R WhiteHead of the Monetary and Economic DepartmentBank for International Settlements, Basel
Slides prepared for the Chatham House Conference on Global Financial ImbalancesNew York, 24 April 2006
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Four sections
Everything is interrelated The facts What are people worried about? Should they be worried?
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Everything is interrelated
(S-I) = (X-M) = CF = (M*-X*) = (I*-S*) External imbalances reflect internal imbalances Should they be worried?
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The facts
the US trade deficit is huge the trade counterparties are diverse the US also borrows to lend the sources of finance are diverse but changing
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What are people worried about?
a smooth adjustment is possible, but not inevitable
problems of factor adjustment protectionism impatience in financial markets
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Should they be worried?
a current account perspective a currency share perspective a financial problem needing a real solution
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No problem from a current account perspective? three reasons why strong US productivity growth
helps the “savings glut” hypothesis the valuation bonus for the US dark matter
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But counterarguments are convincing troubling facts and the productivity argument foreign dissaving with the US at full employment the valuation loss for foreigners even less than meets the eye
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No problem from a currency share perspective? private sector holdings of dollar liabilities public sector holdings of dollar liabilities former much larger, but influenced by the latter
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Private sector holdings not a problem? no dollar overhang home bias is big but declining moderate increases in rates provide adequate
support for dollar
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But counterarguments are convincing moderate covering could have big effects declining home bias cuts two ways low domestic rates support spending and
imports
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Public sector holdings not a problem? no dollar overhang (ex Japan) the Bretton Woods II hypothesis the world needs the liquidity
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But counterarguments are convincing the dollar “bloc” is getting smaller vendor financing is convenient, not sustainable more global liquidity creates more problems than
its cures
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Conclusions
do global imbalances matter? arguments both ways, BUT mean-reversion is more common than not
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