Global current account imbalances Handout2009

Global current account imbalances Handout2009 - Global...

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Global Current Account Imbalances: Orderly or Disorderly Rebalancing? Nouriel Roubini NYU October 2009
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Global imbalances Global imbalances are large and were growing for a while US large deficit and Rest of the World (ROW) large surpluses US deficit: $665b in 2004; about $800 in 2005-2006 (6.5% of GDP). Shrinking slowly since 2007 Some other countries had current account deficits: those countries all had housing bubbles in recent years Concern about global current account imbalances. They were one of the causes of the global crisis and there is a risk of a disorderly rather than orderly adjustment if the dollar were to collapse
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Causes of US deficit Savings-Investment Approach CA =S p + S g – I 1990s: CA deficit driven by investment boom in face of rising public savings Since 2000, Investment fell by 4% of GDP while CA deficit worsened by 2% of GDP. Why? Fiscal Balance went from 2.5% surplus in 2000 to 3.5% deficit in 2004. So emergence of Twin Deficits in the US After 2003 deficit widened in spite of fall in budget deficit as the housing bubble led to a boom in investment and a fall in private savings Improvement since 2007 because of fall in investment and increase in private savings Why the deficit may worsen again: 1.Some of the improvement is cyclical rather than structural as imports collapsed during the recession. So the deficit may widen again during a recovery 2. Large fiscal deficits may lead again to twin deficits in the future. Private savings and fall in investment allow more domestic financing of the external deficit 3. Rising oil prices may widen the deficit further
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Dollar value and the current account Usually periods of dollar appreciation are associated with worsening trade balance (1980-85, 1995-2002) Usually periods of dollar depreciation are associated with improving trade balance (1986-1990) This implies that the dollar needs to fall further sharply to improve the US current account deficit
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The puzzling experience since 2002 The dollar started to fall between 2002 and 2004 relative to floating currencies (Euro, Pound, Aus $, Canadian $, etc.) but the current account worsened in that period (even if it has started to improve in 2007). $ weakened until 2005 then rallied, then weakened again until 2007 and rallied again in 2008 as flight to safety during the crisis led to a stronger dollar. Recent weakening of the dollar since March 2009 as risk aversion has fallen Why worsening current account until 2007 in spite of weaker $? It is not just J-curve effects. It is not just oil prices as non-oil import rose as well
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Expenditure switching and expenditure reduction To have an effect on the trade balance you need both: “Expenditure switching” through a nominal and real depreciation of the currency that makes imports expensive and exports cheaper “Expenditure reduction” as CA deficit is an excess of expenditures (C+I+G) over income (GNP) as CA = GNP – (C+I+G)
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Global current account imbalances Handout2009 - Global...

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