Macroeconomic Imbalances in the World Economy

Terry Roe, Mathew Shane and Kari Heerman

No 109244, Working Papers from University of Minnesota, Center for International Food and Agricultural Policy

Abstract: This paper explores the emergence of large current account imbalances in a few large countries, the factors behind the emergence, the role of those imbalances in the financial crisis of 2008-09, and the implications of achieving global balance. Imbalances reflect a country’s net savings and suggest that growth in GDP of a surplus country is partly dependent upon growth in external demand of deficit countries. Although a country can incur a surplus or deficit for ever, we suggest that the increasing surpluses of relatively large and rapidly growing countries is likely to be destabilizing to global growth in the long-run. The adjustment will likely require a surplus country, such as China, to rely more on domestic demand for growth while a deficit country, such as the U.S., may need to rely more on external demand for growth. We suggest the Eurozone imbalances are not directly linked to U.S. imbalances. There are a variety of potential causes of global imbalances including excess savings in surplus countries, the twin deficit hypothesis, the export-led growth hypothesis, and the possible miss-measurement of the U.S. current account due to repatriation of profits from U.S. owned foreign affiliates. However, whatever the combination of causes of the growing imbalances, adjustments need to be made to return to long-terms sustainable growth.

Keywords: International; Relations/Trade (search for similar items in EconPapers)
Pages: 24
Date: 2011-07
New Economics Papers: this item is included in nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ags:umciwp:109244

DOI: 10.22004/ag.econ.109244

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