Global Imbalances
Global imbalances refers to the persistent pattern of large current account deficits in some economies matched by large surpluses in others. The most prominent case is the deficit of the United States, financed by surpluses in China, Germany, Japan, and oil-exporting economies. The concept is central to debates about the sustainability of international capital flows and the functioning of the international monetary system.
Origins and Patterns
Global imbalances widened markedly in the 1990s and 2000s, as the United States ran large current account deficits and several emerging economies accumulated reserves and surpluses. The pattern reflected a combination of factors, including differences in saving and investment, exchange rate policies, and the demand for reserve assets.
Surplus countries accumulated foreign exchange reserves, particularly in dollar-denominated assets, as a form of self-insurance against financial crises and as a byproduct of exchange rate management. Deficit countries, especially the United States, supplied the reserve assets and absorbed the corresponding capital inflows, financing consumption and investment.
Explanations
Several explanations have been offered. The saving glut hypothesis attributes the imbalances to an excess of global saving relative to investment opportunities, driven by reserve accumulation, by high saving in some emerging economies, and by corporate and household saving in surplus countries. The resulting demand for safe assets depressed global interest rates and encouraged borrowing in deficit countries.
Alternative explanations emphasise exchange rate policies that kept currencies undervalued, differences in financial development that made certain assets more attractive, and demographic factors that influenced saving behaviour. The relative importance of these factors remains debated.
Sustainability and Adjustment
Sustained imbalances imply the accumulation of external liabilities by deficit countries and of claims by surplus countries. Whether this is sustainable depends on the willingness of creditors to hold the liabilities and on the growth of the debtor's economy. A sudden loss of confidence could trigger disorderly adjustment, with sharp exchange rate movements and disruptions to financial markets.
Adjustment requires changes in saving and investment in both surplus and deficit countries. Policies that reduce deficits include fiscal consolidation and measures to raise saving, while policies in surplus countries include stimulus to domestic demand and currency appreciation. International coordination can facilitate adjustment by ensuring that the burden is shared.
Implications for the International System
Global imbalances raise questions about the role of the reserve currency and the stability of the international monetary system. Reliance on a single national currency as the principal reserve asset creates a tension: the reserve issuer must supply liquidity while maintaining confidence, a tension reminiscent of the Triffin dilemma. Reforms to the system include the development of alternative reserve assets, the strengthening of multilateral surveillance, and measures to improve the resilience of capital flow management.
The Saving Glut Hypothesis
The saving glut hypothesis, advanced by Ben Bernanke and others, attributes global imbalances to an excess of desired saving over desired investment at the global level. Factors contributing to the glut include the reserve accumulation of emerging economies, high saving rates in some surplus countries, and the corporate and household saving behaviour of major economies.
The hypothesis implies that the imbalances reflect global forces rather than the policies of deficit countries alone, and that adjustment requires changes in saving behaviour in surplus countries as much as in deficit countries. It also implies that global interest rates were depressed by the excess saving, encouraging borrowing and contributing to the search for yield.
Alternative Interpretations
Other interpretations emphasise different factors. Some stress exchange rate policies that keep currencies undervalued and generate surpluses, and argue that appreciation would reduce imbalances. Others emphasise differences in financial development that make certain assets more attractive to foreign investors, and demographic factors that influence saving.
The debate matters for policy, because different diagnoses imply different prescriptions. If imbalances reflect a saving glut, surplus countries should stimulate domestic demand. If they reflect exchange rate policies, currency adjustment is central. If they reflect financial factors, reforms to the international monetary system may be needed.
Adjustment and Crisis Risks
Large imbalances imply the accumulation of external liabilities and claims. Adjustment can occur gradually, through changes in saving and investment, or abruptly, through a loss of confidence and a sharp reallocation of capital. The risk of abrupt adjustment is greater where deficits are financed by short-term or volatile flows.
The composition of financing matters. Where deficits are financed by reserve accumulation and official flows, the adjustment may be more orderly, because official holders are less prone to panic. Where they are financed by private portfolio flows, the risk of sudden reversal is higher.
Reform Proposals
Reform proposals include strengthening multilateral surveillance of imbalances, promoting exchange rate flexibility, developing alternative reserve assets to reduce reliance on a single currency, and improving the global financial safety net. The effectiveness of these proposals depends on international cooperation and on the willingness of major economies to adjust.
Lessons from History
Historical episodes of large imbalances, including the interwar period and the Bretton Woods era, ended with disorderly adjustment or systemic change. The lesson drawn by many analysts is that persistent imbalances generate vulnerabilities that can erupt unexpectedly, and that preventive adjustment is preferable to crisis-driven adjustment. This reasoning motivates continued attention to imbalances despite their persistence and the absence of a major crisis in recent years.