How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?

28 Pages Posted: 2 Aug 2006

See all articles by Francis E. Warnock

Francis E. Warnock

University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)

Date Written: July 2006

Abstract

Partly reflecting structural advantages such a liquidity and strong investor protection, foreigners have built up extremely large positions in U.S. (as well as other dollar-denominated) financial assets. This paper describes the impact on global wealth of an unanticipated shock to U.S. financial markets. For every 10 percent decline in the dollar, U.S. equity markets, and U.S. 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 U.S. bonds than U.S. equities; (ii) U.S. exposure has increased for most countries; (iii) on average, U.S. asset holdings of developed countries and emerging markets (scaled by GDP) are very similar; and (iv) based on their reserves position, wealth losses of emerging market governments could on average amount to about 2¾ percentage points of their GDP.

Keywords: U.S. asset holdings, global asset portfolios, disorderly currency adjustments, global current account imbalances

JEL Classification: F31, F32, F34, F37

Suggested Citation

Warnock, Francis E., How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth? (July 2006). IMF Working Paper No. 06/170, Available at SSRN: https://ssrn.com/abstract=920663

Francis E. Warnock (Contact Author)

University of Virginia - Darden Business School ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-6076 (Phone)

HOME PAGE: http://faculty.darden.virginia.edu/warnockf/index.htm

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138-5398

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