Does the macroeconomic policy of the global economy’s leader cause the worldwide asymmetry in current accounts?

Quaas, Georg (2010): Does the macroeconomic policy of the global economy’s leader cause the worldwide asymmetry in current accounts?

Abstract

Schnabl and Freitag (2009) sketch the causal chain that produced the current account surplus in China and the current account deficit of the U.S. (as a part of global imbalances) as follows: declining interest rates in the U.S. cause a redirection of capital flows into the periphery, rising capital inflows into China and other Asian countries trigger currency purchases by periphery central banks, and increasing stocks of foreign reserves on the asset side in the central bank balance sheet are matched by a proportional increase of reserve money on the liability side. To keep the exchange rate stable, foreign reserves are accumulated and reserve money expands. The Peoples Bank of China is trying to fight the inflation pressure with several measures, among them higher interest rates. This attracts even more foreign capital to China. Moreover, it cannot solve a problem that originates in the macroeconomic policy of the global economy’s leader. - A crucial point in this argument is the redirection thesis. The empirical evidence does not support this thesis in several respects—there is no evidence for a redirected capital flow away from the U.S. toward China, and there is no evidence that interest rates controlled by the Federal Reserve are the cause of the capital flow to China.

• Item Type: MPRA Paper
• Language: English
• Keywords: global imbalances, current account surplus, current account deficit
• Subjects: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements

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