Global Imbalances: do Net Capital Flows Still Matter? An International MacroeconoMic Perspective
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GLOBAL IMBALANCES: DO NET CAPITAL FLOWS STILL MATTER? AN INTERNATIONAL MACROECONOMIC PERSPECTIVE
Hélène ReyLondon Business School, CEPR and NBER De Nederlandsche Bank, 2013
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Draw on: “Exorbitant Privilege and Exorbitant
Duty”, with Gourinchas and Govillot (2012)
“The Financial Crisis and the Geography of Wealth Transfers”, with Gourinchas and Truempler (2012)
Reforming the International Monetary System with Farhi and Gourinchas (2012)
Chapter for Handbook of International Economics, in preparation, with Gourinchas
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Financial Globalization Large increase in international
investment positions especially among advanced economies
Trade in financial assets has outpaced trade in goods and services
Financial globalization has gathered pace since the 1990s.
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[Figure]
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French external assets and liabilities (1970-2010; % of GDP)
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
0%
50%
100%
150%
200%
250%
300%
assets/GDPliabilities/GDP
Source: Lane and Milesi-Ferretti updated External Wealth of Nations Database
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Financial crises International economists traditionally
look at current account deficits to predict crises or to forecast consequences of crises.
Financial globalization makes net capital flows less relevant.
Gross capital flows are now key to understand the transmission of international crises.
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External balance sheets Large cross border positions are a vector of
both risk sharing and financial contagion Emerging markets and advanced economies
have very different external portfolios Advanced economies are long in risky
assets, emerging markets are long in safer assets (reserves)
Structure of debt portfolio key to understand crisis transmission (Treasuries versus private label AAA assets)
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Net external risky assets position (% of GDP)
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
-40%
-30%
-20%
-10%
0%
10%
20%
G7 BRIC
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Source: “Exorbitant Privilege and Exorbitant Duty” (Gourinchas, Rey and Govillot (2012))
US external assets
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Source: “Exorbitant Privilege and Exorbitant Duty” (Gourinchas, Rey and Govillot (2012))
US external liabilities
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The World Banker The United States is the centre country
of the International Monetary System The United States is the world banker: US issues short-term low-risk assets (T-
bills) US invests in high risk foreign assets
(foreign equity and direct investment) Earns excess returns on its external
position: “exorbitant privilege”.
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The United States as a Global Insurer
During latest crisis, US net foreign asset position deteriorated massively:
Between 2007:4 and 2009:1, Net Foreign Assets drop by about USD 2.9 tr.
US liabilities held up well (US issuer of the reserve currency, safe haven) and risky assets plummeted.
A deterioration in the Net Foreign Asset position is a wealth transfer to the rest of the world.
Similar to an insurance payment in crisis time.
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Other insurers
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Currency gains and losses
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Balance sheets matter Geography of wealth transfers during the crisis Different fortunes depending on portfolio
structure Countries long equity or FDI tend to have
valuation losses Structure of debt portfolio key: government
debt versus corporate debt Correlation of losses with ABCP conduits, ABS
investments, dollar shortage measure and losses on debt portfolio
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Future: A New Triffin Dilemma?
In the 1960s currencies could be exchanged at a fixed rate against the dollar whose value was fixed against gold.
Triffin observed that global liquidity demand was outgrowing the United States’ gold reserves (backing the dollars held abroad).
Maintaining the gold value of the dollar was increasingly difficult.
Similarly, fiscal capacity of the dollar is not unlimited Backing of the dollar assets becomes gradually smaller
in a world where relative size of the US shrinks. New Triffin Dilemma
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Conclusions
Solving the New Triffin Dilemma (Farhi Gourinchas Rey 2011): develop alternatives to US Treasuries as the dominant reserve asset: multipolar system with the issuance of mutually guaranteed European Bond; open up Chinese financial account, convertibility of the yuan.
More broadly: tracking external balance sheet of countries useful to understand financial vulnerabilities.