A World Out of Balance?: Special Report of the Ceps Macroeconomic Policy Group

by Gros, Daniel; Mayer, Thomas; Ubide, Angel

• ISBN13: 9789290796213
• ISBN10: 9290796219
• Format: Paperback
• Copyright: 2006-09-30
• Publisher: Brookings Inst Pr
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Summary

Over the past decade, the global economy has been on a dynamic path that is clearly unsustainable, with ever-increasing current account deficits in the United States, financed by surpluses in emerging market economies. In its latest report, the authoritative CEPS Macroeconomic Policy Group explores the link between the U.S. deficits and the global savings-investment equilibrium. They find that the U.S. deficit is likely to be even larger than officially reported and that policymakers do not seem willing to undertake the necessary policy adjustments to reduce it.Nevertheless, a reduction in the global supply of savings may force an increase in global interest rates and thus a slowdown in U.S. domestic demand--thus initiating a gradual reduction in deficits. The authors argue that a key responsibility of U.S. policymakers is to allow this process to happen, thereby avoiding the risk of a disruptive adjustment later.

Table of Contents

Preface	i
Non-Technical Summary	1	(2)
Executive Summary	3	(5)
Introduction	8	(4)
Is the US external position sustainable?	12	(23)
How it came about	12	(4)
The role of offshoring	16	(3)
Why sustainability might not be a problem: The role of net investment income and the currency composition of US assets and liabilities	19	(2)
Why it may be worse than the official data suggest	21	(11)
Market reactions: How likely is a sudden drop of the US dollar?	32	(3)
Changes in Global Financial Markets and the US Current Account Deficit	35	(15)
Booms and busts in emerging markets as the primary driver behind increased world savings	35	(3)
G-3: After the boom also the investment bust	38	(2)
Effects on current account balances	40	(10)
The Oil Price and the Sudden Emergence of Another Source of Excess Savings	50	(13)
A strong demand shock?	51	(2)
A very tight supply situation	53	(4)
An important portfolio shock	57	(1)
The longer-term outlook for oil prices	58	(5)
Theories to Fit the Facts	63	(17)
Enter the savings glut hypothesis	63	(1)
The savings vs. the liquidity glut hypotheses	64	(6)
A few empirical observations	70	(3)
The key factor behind the problem: The curse of the domestic Phillips curve	73	(7)
Mind the Principle of Mean Reversion	80	(3)
Conclusions	83	(2)
References	85