A SURVEY OF RECENT DISCOURSE ON THE GLOBAL IMBALANCES
The increase in “global imbalances” has often been cited as a key risk to the global economy and financial system. This paper surveys a broad spectrum of perspectives on this complex and multi-dimensional issue, and provides a brief historical account of the workings of the Bretton Woods system. By considering recent history and taking into account latest developments in the global trade and financial arena, we aim to provide a useful platform on which discussions about the implications arising from these imbalances can be framed. In this regard, we note that on one side of this debate, a number of economists have argued that the growing trade imbalances – with a corresponding reduction in “home bias” on the financial front – merely reflected the largely beneficial effects of globalization. This benign view stresses the efficient intermediation role of the global financial system. Some have also characterized the present system as a form of Bretton Woods II arrangement, with theUS as the core country and Asia ex-Japan as the new periphery. Others, however, are of the view that the present global imbalances are inherently unsustainable. Such imbalances reflect ever rising US external debt and persistently low US saving. Eventually, foreign investors might become increasingly reluctant to raise their holdings of US assets. Although the evolution of the deficit and conditions in financial markets have been rather benign in recent years, proponents of this view caution against complacency.
Asset prices and monetary policy: booms and fat tails in East Asia
Do housing and equity booms significantly raise the probability of extremely bad outcomes at the margin? This study addresses this question for a group of 8 East Asian countries. The main findings are the following: (i) Asset price booms in housing and equity markets, either separately or jointly but especially in housing, significantly raise the probability at the margin that (a) the real output gap will be in the left tail of its distribution, in which output is significantly below trend, and (b) the price-level gap will be in the right tail of its distribution, in which the price level is significantly above trend. At the margin, the risk of the occurrence of these particular tail events due to asset price booms is largely asymmetric and does not apply to the tails of good outcomes; and (ii) Expected real output and price level outcomes that are either obtained without conditioning on asset price booms or are obtained conditional on asset price booms using the normal approximation underestimate the risk of tail events and lead to less pessimistic but misleading inferences. One implication for monetary policy is that an approach that is ex-ante more compatible with risk management may be appropriate.
Presentation on the Global Economy by Simon Johnson
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