Global imbalances from a stock perspective. The asymmetry between creditors and debtors

Summary

Focus

This paper explores whether the accumulation of net foreign assets (NFAs) feed into larger external imbalances. This is done by analysing the impact of external positions on the current account for a panel of 39 economies.

Contribution

The analysis of external imbalances usually focuses on the current account (a flow). In this paper, we stress the role of net foreign assets (a stock). A priori, larger NFA positions would widen current account imbalances and feed into even larger NFA positions. So, stock imbalances are expected to be destabilising and this would entail that global imbalances would be harder to rein in.

Findings

For creditor countries, stock imbalances are indeed destabilising: the accumulation of external wealth feeds into larger current account surpluses. On the contrary, for debtor countries external debt is stabilising as it limits current account deficits. The income balance, which conveys the returns on external assets and liabilities, widen the imbalances in both groups of countries, as expected. But the trade balance reacts differently for creditors and for debtors. External wealth accumulation in creditor countries fails to increase consumption or imports. Thus, creditors do not reduce the trade balance surpluses as NFAs increase. For debtor countries, the accumulation of external debt reduces imports and consumption. As a result, the trade balance improves. This improvement more than offsets the current account deterioration induced by the income balance. That is why stock imbalances in debtor countries are stabilising. The asymmetry between debtor and creditors has implications for the adjustment dynamics in the global economy.

Abstract

After the recent crisis, a reduction was observed in global current account (flow imbalances). Still, global disequilibria as measured in terms of countries' net foreign assets (stock imbalances), kept increasing. This paper studies whether stock imbalances have a stabilizing or destabilizing impact on countries' accumulation of external wealth and why. Our results show that in debtor economies the existing stock of net debt is stabilising as it helps to reduce trade imbalances, limit current account deficits and halt future debt accumulation. In creditor countries, instead, the positive stock of net foreign assets contributes - everything else equal - to increase future current account surpluses, as trade balances do not adjust, potentially leading to destabilizing dynamics in wealth accumulation. The asymmetry may have relevant implications for global trade and growth.

JEL classification: F32, F34

Keywords: global imbalances, current account,international investment position,external debt