GLOBAL IMBALANCES, CAPITAL FLOWS, AND THE CRISIS Gian Maria Milesi-Ferretti International Monetary Fund
Global imbalances have declined..
Even though stock positions are still expanding 20 15 Net foreign assets (in percent of world GDP) 10 5 0-5 -10-15 -20-25 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 US JPN Eur surplus CHN EMA OIL ROW Eur deficit Discrepancy
Imbalances in the euro area Joint work with Ruo Chen and Thierry Tressel A lot of emphasis on intra-euro area factors in explaining internal imbalances Loss in competitiveness Paper stresses external factors and shocks and pattern of external financing
Imbalances in the euro area: REER and Asymmetric Trade Shocks Euro appreciation, 2000-onwards Trade with non-euro countries explains a large share of worsened CA in Southern Europe Imports from China Increase in commodity prices In contrast, Germany s TB gained from rising exports to China, CEE and oil exporters Exports of investment goods to China Commodity exporters have high demand for German K- goods
Imbalances in the euro area: Financing of deficits Southern deficits financed mainly by euro area investors. Outside investors purchased German and French securities External exposure and public debt Private sector sold government bonds to non-residents and banks raised funds overseas. Proceeds used to finance C & I worsened private balance sheets, increased foreign exposure to public debt and domestic banks
Share of outstanding debt securities held outside the euro area (2008) 40% 35% 30% 25% 20% 15% 10% 5% 0%
Is Rebalancing Underway? Work with Philip Lane on factors explaining contraction in CA balances Hypothesis: unwinding of pre-crisis excesses Easy credit Asset price bubbles Rosy growth expectations
Estimation of excess CA Panel regressions, advanced economies and emerging markets, 1969-2008, 4-year averages Determinants include: Demographics Level of development Fiscal balance Oil prices etc.
Very strong correlation between pre-crisis gap and subsequent CA adjustment change in CA balance, 2010 vs 2005-08 -.1 0.1.2 ICE BLG LVA EST LIT HUN NZE SER CROSWI ROM ESP SVK SAF IRE SLV PAK US AUS GTM PRT CRI BEL DEN ELS TAI THA KOR URU PHL GRE UK MEX SLKUKR TUR COL NLD AUT GER ITA FRA POL IDN JPN CZE CHL IND FIN ARG BRA PER TUN ISR SWE DR RUS SGP HKG MOR NOR LBN CHN CAN MYS BLR -.2 -.1 0.1.2 residual CA 2005-08
How did adjustment take place? Changes in domestic demand Change in real domestic demand, 2007-10 -.4 -.2 0.2.4 BLR CHN PER SGP LBN INDARG IDNSLK CHL URU MORDR BRA TUN PHL COL HKG MYS POL PAK AUS CAN ISR CRI THA KOR GTM GER SWE LUX NLD NOR TUR TAI SAF SWI RUS FRA AUTBEL CZE MEX CYP FIN PRT US SVK JPN ITAUK NZE SER DEN SLV ELS GRE ESP ROM UKR CRO HUN IRE ICE LIT EST LVA BLG -.1 0.1.2.3 change in CA balance, 2007-10
and changes in output Change in real GDP, 2007-10 -.2 -.1 0.1.2.3 BLR CHN LBN IND PER URU ARG IDNSLK SGP DR MOR BRA TUN PHL ISR MYS POL TAI PAK KOR CHL THACOL HKG CRI GTM AUS SVK TUR SAF SER SWI CYP CANLUX NLD GER RUS AUTBEL CZE MEX US SWE NOR FRA PRT ELS NZE JPN FIN UK ESP ROM DEN SLV ITA GRE CRO HUN UKR IRE ICE LIT EST BLG -.1 0.1.2.3 change in CA balance, 2007-10 LVA
Some exchange rate adjustment in nonpegs BRA change in REER, 2010 vs 2005-8 average -.4 -.2 0.2 CHN RUSISR JPN IDN CZE SGP TUR PER IND CHLMYS CANNOR DR MOR TUN POL SWE UKR MEX ARG COL SLK CRI UK AUS PHL SAF SWI THA URU GTMPAK US KOR ROM SER NZE HUN -.05 0.05.1.15 change in CA balance, 2010 vs 2005-08 ICE
but not in pegs change in REER, 2010 vs 2005-8 average -.1 -.05 0.05.1.15 BLR LBN HKG SVK GRE CRO DENCYP ESP LUX BEL ELS SLV ITA NLD FRA AUTPRT FIN GER IRE TAI LIT EST LVA BLG -.1 0.1.2 change in CA balance, 2010 vs 2005-08
Summary Very strong CA adjustment after 2007-08 Reduction of pre-crisis excesses CA reduction reflecting primarily compression of demand and output in countries with excess deficits, and swings in other investment flows Modest role of REER adjustment Role of external finance Looking forward: durable rebalancing or cyclical compression? What are the output gaps in deficit countries?
Capital flows have recovered only for emerging markets 10000 8000 6000 Capital inflows (annualized rates, billions USD) 4000 2000 0-2000 -4000 Advanced economies Emerging markets -6000