I did this notes for one of my courses as a background to review the classical concepts in terms of imbalances from trade and international finance perspective.
Hi Michael, thanks for your comment and for sharing your work. I plan to write a follow-up to address some of your questions. Here, as you note, I am trying to stress that the configuration of these imbalances goes beyond the gains from the trade dimension and needs to incorporate a financial dimension. I will read your work as I prepare the second part, in which I was indeed planning to cover long-lasting imbalances.
This is a great note, thanks Gianluca. This is really helpful, also for my own teaching at the University of Cologne. I find the public discussions about the trade balance misguided, if they do not incorporate the current account. Advertising a little bit my own work, I would like to mention here a paper of mine with the late Thomas Laubach of the Fed and Mathias Hoffmann of the Deutsche Bundesbank in The Economic Journal from 2017 titled "The Expectations-Driven U.S. Current Account" where we explain the Current Account (and thus indirectly the trade balance) with differential growth expectations of the U.S. and the rest of the world. The U.S. can afford to consume more than it produced (and thus save less than it invests) because global investors are willing to lend to the U.S. The take away for me about the economic problems with Trump's policies (and announcements): the US will never be able to close its trade deficit if it does not stop running large private and public deficits. A question, the answer to which I have not looked up yet: how much of this capital inflow is other countries' build up of Dollar reserves? Can we explain the perpetual inflow of funds with the role of the dollar as a reserve currency? Or is that better understood as a stock, with no large role with the flows?
Thank you so much for this - I always found international trade/finance difficult to grasp, but this helped a lot by breaking it down into simple, well explained parts!
How about the Pettis-Klein argument whereby persistent current account imbalances stem from domestic structural and distributional distortions whereby some countries take deliberate policy choices to suppress household incomes (either via wages, interest rates, or the financial system), reduce consumption or investment, and accumulate large surpluses, while ROW is effectively forced to absorb those surpluses by consuming more?
Thanks!
Thanks, Andrei. I plan to discuss this. Here, I was focusing just on the main approaches. In this older post (https://gianlucabenigno.substack.com/p/the-global-financial-resource-curse?r=nm3g) I anticipate some of the themes that I plan to discuss and relate to the Pettis-Klein view.
Hi Michael, thanks for your comment and for sharing your work. I plan to write a follow-up to address some of your questions. Here, as you note, I am trying to stress that the configuration of these imbalances goes beyond the gains from the trade dimension and needs to incorporate a financial dimension. I will read your work as I prepare the second part, in which I was indeed planning to cover long-lasting imbalances.
This is a great note, thanks Gianluca. This is really helpful, also for my own teaching at the University of Cologne. I find the public discussions about the trade balance misguided, if they do not incorporate the current account. Advertising a little bit my own work, I would like to mention here a paper of mine with the late Thomas Laubach of the Fed and Mathias Hoffmann of the Deutsche Bundesbank in The Economic Journal from 2017 titled "The Expectations-Driven U.S. Current Account" where we explain the Current Account (and thus indirectly the trade balance) with differential growth expectations of the U.S. and the rest of the world. The U.S. can afford to consume more than it produced (and thus save less than it invests) because global investors are willing to lend to the U.S. The take away for me about the economic problems with Trump's policies (and announcements): the US will never be able to close its trade deficit if it does not stop running large private and public deficits. A question, the answer to which I have not looked up yet: how much of this capital inflow is other countries' build up of Dollar reserves? Can we explain the perpetual inflow of funds with the role of the dollar as a reserve currency? Or is that better understood as a stock, with no large role with the flows?
Thank you so much for this - I always found international trade/finance difficult to grasp, but this helped a lot by breaking it down into simple, well explained parts!
How about the Pettis-Klein argument whereby persistent current account imbalances stem from domestic structural and distributional distortions whereby some countries take deliberate policy choices to suppress household incomes (either via wages, interest rates, or the financial system), reduce consumption or investment, and accumulate large surpluses, while ROW is effectively forced to absorb those surpluses by consuming more?
Great post!