Explaining global imbalances: the role of central-bank intervention and the rise of sovereign wealth funds

Richard Senner and Didier Sornette
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Didier Sornette: Professor, Chair of Entrepreneurial Risks, Department of Management, Technology and Economics, ETH Zuürich (Swiss Federal Institute of Technology), Switzerland and Chair Professor, Institute of Risk Analysis, Prediction and Management (Risks-X), Academy for Advanced Interdisciplinary Studies, Southern University of Science and Technology (SUSTech), Shenzhen, China

Review of Keynesian Economics, 2021, vol. 9, issue 1, 61-82

Abstract: Neoclassical economic theory views current-account imbalances as the result of (individual) decisions to save more than to invest domestically. Monetary analysis in the Keynesian tradition rejects such approaches and emphasizes that a country's net savings are the result, not the cause, of net selling of goods and services to foreigners. The latter, in turn, depends on global demand patterns and absolute advantages between countries. We complement this Keynesian approach, taking a closer look at the financial account of the balance of payments: a necessary condition for countries to net-sell goods and services to foreigners is the willingness of domestic sector(s) to accumulate net foreign assets. While previous analysis of global imbalances has partially discussed the role of central banks' reserve accumulation it has failed to incorporate the macroeconomic role of sovereign wealth funds (SWFs). We analyse eight surplus countries' external positions and find that the public sector typically purchases and manages significant amounts of foreign assets via both central banks and SWFs. This, in turn, supports current-account surpluses. We then consider the particular case of Switzerland where, contrary to other surplus countries, public-sector purchases of foreign assets had been absent for a long time, yet set in massively after 2008.

Keywords: foreign reserves; sovereign wealth funds; international investment position (search for similar items in EconPapers)
JEL-codes: E58 F31 F32 O24 (search for similar items in EconPapers)
Date: 2021
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