Global imbalances from a stock perspective: The asymmetry between creditors and debtors

After the global financial crisis, a reduction in global current account (flow) imbalances was observed. Still, global disequilibria as measured in terms of countries’ net foreign assets (stock imbalances) kept increasing. This paper explores the link between stock and flow imbalances. Our results show that stock imbalances are self-correcting or stabilizing in debtor countries but self-feeding or destabilizing in creditor countries. In debtor economies, the negative net foreign asset position improves the current account balance, helping to limit the accumulation of net external debt. In creditor countries, the positive net foreign asset position also improves the current account, leading to additionally increasing net external assets. The decomposition of the current account reveals that the income balance widens stock imbalances in both cases. The asymmetry between creditors and debtors is explained by the differential behavior of the trade balance, which fails to adjust in the case of creditors.