Financial Factors Drive Widening Imbalances Across 28 Economies

Financial factors, including asset-price changes and investment income, have become the main force widening global imbalances across 28 economies, increasing exposure to negative cross-border spillovers from market corrections.

The economies examined represent about 85% of global gross domestic product. Their net international investment positions — external assets minus external liabilities — have diverged as the United States’ position weakened while those of most other major economies improved.

Valuation changes and investment-income flows were the primary drivers over both short and long horizons. Trade played a larger role over longer periods, but financial developments had a broader effect on countries’ external positions.

Valuation gains on international investment positions have supported economic growth in many countries since 2010. Those gains have also increased exposure to corrections in financial markets, creating channels through which losses in one market can produce negative effects elsewhere.

Four scenarios were modeled: a sharp depreciation of the U.S. dollar, a repricing of global equity markets, higher global interest rates and a 50% reduction in trade imbalances. Attempts to reduce current imbalances would produce substantial international spillovers, with effects varying according to the adjustment mechanism and the country involved.

In the simulations, a correction in U.S. equity markets would generate significant adverse spillovers across most of the economies examined. The analysis also indicates that widely discussed policy proposals would have limited effects, while global imbalances would continue widening if current trends persist.