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The Impact of a Disorderly Resolution of Global Imbalances on Global Wealth
Author(s) -
Warnock Francis E.
Publication year - 2008
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/j.1468-0300.2008.00201.x
Subject(s) - emerging markets , market liquidity , liberian dollar , equity (law) , financial market , monetary economics , economics , stylized fact , bond , position (finance) , us dollar , basis point , asset (computer security) , business , international economics , finance , interest rate , currency , macroeconomics , political science , law , computer security , computer science
Partly reflecting structural advantages such as liquidity and strong investor protection, foreigners have built up extremely large positions in US (as well as other dollar‐denominated) financial assets. This paper describes the impact on global wealth of an unanticipated shock to US financial markets. For every 10 per cent decline in the dollar, US equity markets, and US bond markets, total wealth losses to foreigners could amount to about 5 percentage points of foreign GDP. Four stylized facts emerge: (i) foreign countries, particularly emerging markets, are more exposed to US bonds than to US equities; (ii) over time US exposure has increased for most countries; (iii) on average, US asset holdings of developed countries and emerging markets (scaled by GDP) are very similar; and (iv) based on their reserves position alone, wealth losses of emerging market governments could on average amount to about 2¾ percentage points of their GDP.