External Macroeconomic Imbalances: Causes and Consequences

This chapter explores the external imbalances - which have international financial consequences by virtue of the identity that relates trade imbalances to international financial flows - characteristic of contemporary global capitalism. The chapter first outlines the narrow neoclassical explanation of these imbalances, as constituting little more than an un-exceptional feature of a dynamic program derived from inter-temporal optimization, that will eventually resolve in the elimination of all imbalances. This view is rejected in favour of one more befitting of the MKS system (and echoing the concerns of Hyman Minsky with respect to domestic finance), in which global imbalances may represent potential sources of macroeconomic malfunction and/or instability. Given its international character - and our focus on the US economy in other chapters notwithstanding - chapter 5 is used as an opportunity to explore some of the stylized facts associated with, and challenges facing, the European economies, and particularly those bound together in the Eurozone.