Global Imbalances and the Financial Crisis

Obstfeld and Rogoff have a new paper on this important topic.

2 replies on “Global Imbalances and the Financial Crisis”

Plus ça change, plus c’est la même chose!
China has effectively pegged the renminbi to the dollar since July 2008. The renminbi had risen about 20% in the previous 3 years but estimates of current undervaluation range from 20 to 40%.

On Thursday, several Asian central banks intervened in the currency markets to buy dollars, apparently fearful of being at a disadvantage in export markets against the Chinese.

The IMF suggests that the level of currency reserves during the financial crisis was not a key factor for countries and it cites the experience of high reserve economy Brazil compared with low reserve economy Mexico.

It looks as if Asian countries will regard high reserves as key stablisers during the crisis. The most significant economy with low reserves Indonesia, was hit by some scary currency movements but regional coordination of swap deals was a help.

The US current account deficit will remain at a lower level for sometime but it will be back to business as usual for Asia but with lower exports potential in the EU and US.

China is likely to deploy some of its reserves for significant resources investments in coming years such as the interest in buying a portion of Nigerian oil reserves.

Oil and gas resources in Burma make China the paymaster but the junta still needs to charge the thousands of its destitute citizens who are held in camps in neighbouring countries as illegal migrants, the equivalent of a month’s earnings to process paperwork prior to deportation.

The US softly softly policy towards Wall Street for fear of imperiling the recovery, will be largely replicated in economic relations with China. They both need each other but one can only go so far in tweaking the tail of your biggest creditor.

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