Global Imbalances and External Adjustment After the Crisis

The IMF WP version of my paper on this topic (joint with Gian Maria Milesi-Ferretti) is available here.

Summary: This paper has two objectives. First, it reviews the recent dynamics of global imbalances (both “flow” and “stock” imbalances), with a special focus on the shifting position of Latin America in the global distribution. Second, it examines the cross-country variation in external adjustment over 2008-2012. In particular, it shows how pre-crisis external imbalances have strong predictive power for post-crisis macroeconomic outcomes, allowing for variation across different exchange rate regimes. We emphasize that the bulk of external adjustment has taken the form of “expenditure reduction”, with “expenditure switching” only playing a limited role.


10 replies on “Global Imbalances and External Adjustment After the Crisis”

Interesting paper. There is a special focus on Latin America though the lessons are universal. The paper concludes with a call to “search for policy configurations that can make the adjustment process less costly through … faster demand growth in surplus countries”. Well coincidentally today we have the German government financing plan for the coming years, with zero net borrowing already for next year. Yet the long term challenge to public finances is probably greatest in Germany, as Figure 1, page, in another IMF working paper, just out too, shows { } (Changes in the Working-Age Population). That IMF paper asks the question, “Is Japan’s Population Aging Deflationary”. But we could ask exactly the same question about Germany and the relation with the euro area policy making.

on other global imbalances – text from Blind Biddy in Paris – Paris? Ah yes – la Rugbai ….

‘And then, of course, there’s the unmentionable. When “we” liberated Kuwait in 1991, we all had to recite – again and again – that this war was not about oil. And when we invaded Iraq in 2003, again we had to repeat, ad nauseam, that this act of aggression was not about oil – as if the US Marines would have been sent to Mesopotamia if its major export was asparagus. And now, as we protect our beloved Westerners in Irbil and succour the Yazidis in the mountains of Kurdistan and mourn for the tens of thousands of Christians fleeing from the iniquities of Isis, we must not – do not and will not – mention oil.

I wonder why not. For is it not significant – or just a bit relevant – that Kurdistan accounts for 43.7 billion barrels of Iraq’s 143 billion barrels of reserves, as well as 25.5 billion barrels of unproven reserves and three to six trillion cubic metres of gas? Global oil and gas conglomerates have been flocking to Kurdistan – hence the thousands of Westerners living in Irbil, although their presence has gone largely unexplained – and poured in upwards of $10bn in investments. Mobil, Chevron, Exxon and Total are on the ground – and Isis is not going to be allowed to mess with companies like these – in a place where oil operators stand to pick up 20 per cent of all profits.

Indeed, recent reports suggest that current Kurdish oil production of 200,000 barrels a day will reach 250,000 next year – providing the boys from the caliphate are kept at bay, of course – which means, according to Reuters, that if Iraqi Kurdistan were a real country and not just a bit of Iraq, it would be among the top 10 oil-rich countries in the world. Which is surely worth defending. But has anyone mentioned this? Has a single White House reporter pestered Obama with a single question about this salient fact?–and-dont-dare-mention-oil-9660393.html

p.s. Seven_of_9, after dropping Blind Biddy off from her trip to Saturn, is staying with ME for a while (-; Unfortunately, she has reminded me of The Prime Directive and cannot intervene at the mo on the idiocies of the humanoids …

… and Europe in regression …

You might think a story about modern-day Nazi storm troopers attacking a European city without mercy would merit front-page coverage in the U.S. press, but not when the Nazi paramilitaries are fighting for the U.S.-backed Ukrainian government and are killing ethnic Russians, writes Robert Parry.

The U.S.-backed Ukrainian government is knowingly sending neo-Nazi paramilitaries into eastern Ukrainian neighborhoods to attack ethnic Russians who are regarded by some of these storm troopers as “Untermenschen” or subhuman, according to Western press reports.

Recently, one eastern Ukrainian town, Marinka, fell to Ukraine’s Azov battalion as it waved the Wolfsangel flag, a symbol used by Adolf Hitler’s SS divisions in World War II. The Azov paramilitaries also attacked Donetsk, one of the remaining strongholds of ethnic Russians opposed to the Kiev regime that overthrew elected President Viktor Yanukovych last February.

@John Bruton


@Philip Lane

‘Ireland an extreme outlier …’. Quite

Check ur first name on cover page.

‘… a new wave of evidence that the narrowing of large external imbalances can inflict considerable macroeconomic pain on deficit countries if it
requires a sharp adjustment over a limited time horizon, especially (but not exclusively) for countries that lack monetary autonomy.’ Quite!

The ‘odious’ component of the local ‘extreme outlier’ deficit ~=2 Billion in interest p.a.

Why not stop it? The original performed NO useful ‘welfare’ function; it is essentially a ‘rip-off’ of the Citizenry by an abstract Financial System to the benefit of a tiny few. ‘Lunatic Capital Flows’, at the mo, remain free to annexe Citizenries, and states’ resources, when the next opportunity arises.

How does one model ‘tyrannical power’?

finally [h/t Seven_of_9]

It will go down in history as the moment one of the last bastions of male dominance fell. A woman has won the world’s most prestigious mathematics prize for the first time since the award was established nearly 80 years ago.

Maryam Mirzakhani, an Iranian maths professor at Stanford University in California, was named the first female winner of the Fields Medal – often described as the Nobel prize for mathematics – at a ceremony in Seoul on Wednesday.

Shocking! A Woman! And an Iranian!

@Minister Flanagan

Open that embassy!

It will be interesting to see how the European Commission and the Council of Ministers respond to France’s attempts to reduce its fiscal imbalance. The economy there was flat in q2 and q1, reducing annual growth to just 0.1%, prompting the French authorities to halve the 1% official forecast for 2014.That means their deficit target of 3.9% of GDP will be missed, a familiar story of late, and general government debt is now approaching 100%


In Spetember, they will send a stiff letter and might even call a meeting or two. Deflation risks in the core must be rising with growth collapsing and inflation falling to virtually zero.
Would you like some QE in the hand?

Major global trade trends are also factors in imbalances that are not easily countered by policy moves.

Japanese imbalances were solved by massive misgovernance and a business model that was once impressively successful but eventually was hobbled by bureaucracy and cultural constraints including misogyny and antipathy towards immigration.

China’s surplus with the US is partly exaggerated as it is at the end of an Asian supply chain e.g. the manufacturing of the iPhone.

It grew from the moving of manufacturing from the US.

Even though China’s direct spending on construction is classified as investment, as we should know, it impacts many sectors of an economy.

Five non-euro area countries together with France and Austria accounted for 79% of Germany’s merchandise trade surplus of €198bn in 2013.

US, France, UK, Austria, Turkey, United Arab Emirates and Switzerland accounted for surpluses of €40bn, €36bn, €33bn, €20bn, €9bn, €9bn and €9bn respectively, totalling €156bn.

Germany is in deficit with China.

In 2013 almost 800,000 enterprises were active in foreign trade with about 340,000 companies exporting.

In terms of relative performance several factors are relevant: pay, product mix, business structure (size of firms), ratio of exporting firms etc.
Airbus Group that created in the 1960s to provide European collaboration now has revenues of more than €70bn – not too far behind Siemens.

@ Ciarán O’Hagan et al

FYI the FT on the question of “what do we do now?”, posed in particular for Germany.

An optimistic view might be that the economic impact of developments in the Ukraine or, rather, the Alliance – rather than the EU – reaction to them which Germany cannot avoid, will show how daft the policy of (i) budgetary balance (Schaeuble) and (ii) opposition to moves by the ECB (Weidmann) really is.

A pessimistic one might be that the situation will have to get even worse before there is any change; and by then it may well be too late.

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