These slides were adapted from a September 2022 presentation at Columbia University’s School of International and Public Affairs. Some notes on the balance of payments and the definition of valuation effects are attached at the end of the slide presentation.
International trade and international financial integration increased by leaps and bounds during the past three decades. One of the associated policy challenges was the emergence of large current account imbalances across major economies and regions during the early 2000s, which expanded until the inception of the global financial crisis in 2008. While current account imbalances shrank in relation to world GDP in the aftermath of the crisis and remained lower during the past decade, global creditor and debtor positions have continued to expand. This presentation provides an overview of these developments, highlighting the main data trends as well as their interpretation in the economic literature.
In addition to focusing on international borrowing and lending in driving creditor and debtor positions, the presentation highlights the important role of valuation effects triggered by changes in exchange rates and asset prices across the world. Rising global financial integration is associated with growing external asset and liability positions, and these are affected differently by changes in exchange rates and asset prices. For instance, U.S. assets abroad are often denominated in foreign currency while its liabilities are denominated in U.S. dollars, and hence a dollar depreciation increases the value of U.S. assets in dollar terms and improves the U.S. external position. Large movements in exchange rates and stock market valuations around the world during the past decade have played a large role in shaping the evolution of global creditor and debtor positions.
Finally, the presentation discusses the role of international financial centers in global financial integration, as well as the challenges they pose to understanding cross-border financial linkages.