Abstract

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 the US 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.