The Influence of Global Imbalances on the Build-up of the Current Financial Crisis
DOI:
https://doi.org/10.15678/AOC.2013.0903Keywords:
global imbalances, exorbitant privilege, post-Bretton Woods system, financial crisis, current account, exchange ratesAbstract
The issue of global imbalances already emerged in the pre-crisis era, albeit in a different context. Research was mostly concentrated on analysing how distortions in the external positions of the main countries would affect future turbulence on foreign exchange markets and in the real sector before reaching new equilibrium points. This article addresses the problem in a different manner by describing the causal link between monetary and fiscal expansion and the resulting increase in trade deficit. The process of reinvestment of foreign exchange reserves by surplus countries affects credit, stock and real estate markets, thus paving the way for future turmoil.References
Angeloni, I. et al. (2011) “Global Currencies for Tomorrow. A European Perspective”. Economic Paper No. 444, July. Brussels: European Commission.
Bank of Canada (2010) Speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, at the workshop on “Monetary Policy: Recent Experience and Future Directions”, Bank of Canada, Toronto, 9 April, http://www.bis.org/review/r100413e.pdf.
Barrell, R., Davis, E. P., Karim, D. and Liadze, I. (2010) “Does the Current Account Balance Help to Predict Banking Crises in OECD Countries?” http://niesr.ac.uk/sites/default/files/publications/260310_134627.pdf.
Baxter M. (1994) “International Trade and Business Cycles”. RCER Working Paper 390. University of Rochester, Centre for Economic Research (RCER).
Bernanke, B. (1983) “Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression”. American Economic Review 73: 257–76.
Bernanke, B. (2010) “Causes of the Recent Financial and Economic Crises before the Financial Crisis Inquiry Commission”. Washington DC, 2 September, http://www.federalreserve.gov/newsevents/testimony/bernanke20100902a.htm.
BIS (2008) Bank for International Settlements “Central Bank Operations in Response to Global Financial Turmoil”, CGFS Paper No. 31. Committee on the Global Financial System.
BIS (2009) Bank for International Settlements “79th Annual Report, 1 April 2008–31 March 2009”. Basel.
BIS (2011) Bank for International Settlements “81st Annual Report, 1 April 2010–31 March 2011”. Basel.
BIS (2012) Bank for International Settlements “82nd Annual Report, 1 April 2011–31 March 2012”. Basel.
Blanchard, O. and Milessi-Feretti, G. M. (2011) “Why Should Current Account Balances Be Reduced?” IMF Staff Discussion Note, March.
Bordo, M. (2005) “Historical Perspective on Global Imbalances”. NBER Working Paper 11383.
Bordo, M. and Murshid, A. (2002) “Globalisation and Changing Patterns in the International Transmission of Shocks in Financial Markets”. NBER Working Paper 9019.
Bracke, T., Bussiere, M., Fidora, M. and Straub, R. (2008) “A Framework for Assessing Global Imbalances”. Occasional Paper Series of the ECB, January.
Campbell, C. J. (2002) “Petroleum and People”. Population and Environment 24.
Campbell, C. J. (2003) Oil Depletion – The Heart of the Matter. Ireland: Association for the Study of Peak Oil & Gas (ASPO).
Cavallo, M. (2005a) “Government Consumption Expenditures and the Current Account”. FRBSF Working Paper 2005-03.
Cavallo, M. (2005b) “Understanding the Twin Deficits: New Approaches, New Results”. FRBSF Economic Letter No. 2005-16.
Chailloux, A., Gray, S., Kluh, U, Shimizu, S. and Stella, P. (2008) “Central Bank Response to the 2007–2008 Financial Market Turbulence: Experiences and Lessons Drawn”. IMF Working Paper WP/08/210.
Chang-Jin, K. and Nelson C. (1999) “Has the US Economy Become More Stable? A Bayesian Approach Based on a Markov-switching Model of the Business Cycle”. Review of Economics and Statistics.
Erceg, C, Guerrieri, L. and Gust, C. (2005) “Expansionary Fiscal Shocks and the Trade Deficit”. International Finance Discussion Paper No. 825, January. Board of Governors of the Federal Reserve System.
European Central Bank (2014). Introductory statement to the press conference by Mario Draghi with Q&A, January, https://www.ecb.europa.eu/press/pressconf/2014/html/is140109.en.html.
Fic, T. and Orezgani, A. (2013) “Growth Risks for the EU Emanating from Global Imbalances”. Economic Paper No. 483, April. Brussels: European Commission.
Frankel, J. A. (2008) “The Effects of Monetary Policy on Real Commodity Prices” in J. Campbell (ed.) Asset Prices and Monetary Policy. Chicago: University of Chicago Press.
Franklin, A. and Gale, D. (2002) “Asset Price Bubbles and Market Interlinkages”. Federal Reserve Bank of Chicago, conference materials, 22–24 April.
Gust, C., Leduc, S. and Sheets, N. (2008) “The Adjustment of Global External Balances: Does Partial Exchange-Rate Pass-Through to Trade Prices Matter?” FRBSF Working Paper 2008-16, June.
Herrera, S. and Perry, G. (2001) “Tropical Bubbles. Asset Prices in Latin America, 1980–2001”. Policy Research Working Paper 2724, World Bank.
IMF (2008) “Currency Composition of Official Foreign Exchange Reserves (COFER)”, http://www.imf.org/external/np/sta/cofer/eng/index.htm.
Mayer, C. and Pence, K. (2008) “Subprime Mortgages: What, Where, and to Whom?”. NBER Working Paper 14083.
Mishkin, F. S. (1978) “The Household Balance Sheet and the Great Depression”. Journal of Economic History 37: 918–37.
Normandin, M. (1999) “Budget Deficit Persistence and the Twin Deficits Hypothesis”. Journal of International Economics 49: 171–93.
Nur, A. (2004) Oil Future and War Now: A Grim Earth-Sciences Point of View. Geophysics Department, Stanford University.
Obstfeld, M. (2004) “External Adjustment”. NBER Working Paper 10843, October.
Obstefeld, M. and Taylor, A. M. (1997) “The Great Depression as Watershed. International Capital Mobility over the Long Run”. NBER Working Paper 5960, March.
Obstfeld, M., Shambaugh, J. C. and Taylor, A. M. (2004) “The Trillemma in History. Trade-offs among Exchange Rates, Monetary Policies and Capital Mobility”. NBER Working Paper 10396, March.
Okina, K. and Shiratsuka, S. (2001) “Japan’s Experience with Asset Price Bubbles. Is It the Case for Inflation Targeting?” in W. Hunter, G. Kaufmann and M. Pomerleano (eds) Asset Price Bubbles. The Implications for Monetary, Regulatory and International Policies. Cambridge, MA: MIT Press.
Rosati, D. (2009) “Przyczyny i mechanizm kryzysu finansowego w USA” [The causes and mechanism of the financial crisis in the US]. Ekonomista 3: 315–51.
Roubini, N. (1988) “Current Account and Budget Deficits in an Intertemporal Model of Consumption and Taxation Smoothing. A Solution to the Feldstein Horioka Puzzle?”. NBER Working Paper 2773.
Roubini, N. and Soyoung, K. (2004) Twin Deficits or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the US. Korea University and University of New York, mimeo.
Shiratsuka, S. (2003) “Asset Price Bubble in Japan in the 1980s: Lessons for Financial and Macroeconomic Stability”. Discussion Paper 2003-E-15, IMES Bank of Japan.
Sławiński, A. (2007) “Przyczyny i konsekwencje kryzysu na rynku papierów wartościowych emitowanych przez fundusze sekurytyzacyjne” [The causes and consequences of the crisis on the market for securities issued by securitisation funds], http://www.rynkifinansowe.pl/subprime_CDO.pdf.
Summers, P. M. (2005) “What Caused the Great Moderation? Some Cross-country Evidence”. Economic Review of the Federal Reserve Bank of Kansas City.
Taylor, J. B. (1995) “The Monetary Transmission Mechanism: An Empirical Framework”, Journal of Economic Perspectives 9.
Twardosz, A. (2013) “Wielka depresja a współczesny kryzys finansowy – podobieństwa i różnice. Perspektywy dla globalizacji” [The Great Depression and the current financial crisis – a comparative analysis and perspectives for future globalisation]. Zeszyty Naukowe Uniwersytetu Ekonomicznego w Krakowie 9 03. K raków: Cracow University of Economics, pp. 35–53.
