Global Imbalances, Exchange Rates Adjustment and the Crisis: Implications from Network Analysis

The persistence of global imbalances remains a potential source of instability for the international economic system, which ought to be tackled in order to exit from the current crisis in a better position. This paper shows that the complexity of the global network of trade imbalances has increased over time in terms of the number of countries involved and of the heterogeneity of their conditions. These findings imply that orchestrating a global exchange rate adjustment plan, as done in the 1980s to tackle a similar problem, is certainly more difficult than it was 20 years ago. We also show, however, that the uncoordinated movements in bilateral exchange rates occurred since the early 2000s did not go in the direction of reducing bilateral imbalances. Rebalancing the world economy, thus, seems to require a rich set of coordinated policy actions and economic changes, involving adjustments in both exchange rates and real variables, which are heterogeneous at the country level. We argue that, provided some conditions are satisfied, the variegated effects of the ongoing financial crisis, and the policy responses this has induced, may help the global and bilateral rebalancing process.