ABSTRACT
A prominent feature of the global imbalances is a large and widening account deficit in the world's largest and most powerful economy, the US, and growing surplus in emerging markets particularly in East Asia. The surge of oil prices has made oil-exporting countries a major player on the scene. The interplay of US accommodative policy in response to the deflationary pressure following the Asian Financial Crisis—reinforced by the Iraq War—and the resulting strong demand that led to higher oil price have contributed to the current global imbalances. Policy issues surrounding global imbalances need to be analyzed in a dynamic framework by taking into account the long-term paths of relevant variables, and the analysis should ideally be remote from unrealistic assumptions. If the US net debt increases, the US dollar value will depreciate more than what is required by the increase in trade deficit, because larger holding of US assets by foreign investors also means larger interest payment in the future.
