Back to global imbalances?

RBI Governor has expressed that fixing growing imbalances is the key lesson of this crisis. 

World Bank econs, Sergio Schmukler and Luis Servén explore this issue in a research  note. Their summary:

To the extent that the United States is expected to outperform other major industrial countries in the medium term, it might continue receiving foreign capital and the previous pattern of global imbalances might be gradually restored, at least in part.

In that case, and in a similar fashion as pre-crisis capital inflows to the United States led to an exuberant expansion of the real estate sector, an appreciation in other (old or new) U.S. risky assets, may well develop.

However, the post-crisis real and financial adjustments suggest that the previous distribution of large imbalances will be difficult to restore and even more difficult to sustain over the long run. Thus, it would be unwise to dismiss the prospects of an eventual major depreciation of the U.S. dollar against different currencies around the world and of a correspondingly much higher diversification of emerging market holdings into non-U.S. assets.


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