Gunther Schnabl; Stephan Freitag
The paper discusses global imbalances under the aspect of an asymmetric world monetary system. It identifies the US and Germany as center countries with rising/high current account deficits (US) and surpluses (Germany). These are matched by current account surpluses of countries stabilizing their exchange rates against the dollar (dollar periphery) and current account deficits of countries stabilizing their exchange rate against the euro (euro periphery). Meanwhile, the aggregate current account balance of the euro area has been by and large balanced. The paper finds that changes of world current account positions are affected by the macroeconomic policy decisions both in the centers and peripheries, albeit the centers – due to structural characteristics related to size – are argued to have a higher degree of freedom in macroeconomic policy making. In specific, expansionary monetary policy in the US as well as exchange rate stabilization and sterilization policies in the dollar periphery are found to have contributed to global current account imbalances. Given that the sample period for the analysis extends from 1981-2008, the results for Germany mostly capture the situation before the euro was created.