Liquid assets, liquidity constraints and global imbalances.

The world distribution of current account balances has been steadily drifting away from “normality” since 1997. This puzzling development has occurred in parallel with large scale accumulation of official foreign reserve assets in emerging Asia and commodity exporting countries, and a growing role of portfolio flows in financing the US external deficit. The theoretical toolbox that was used to understand “old puzzles” of international macroeconomics may still be relevant to address these new puzzles, to the extent that it focuses more specifically on liquidity aspects: uneven supply of liquid assets, borrowing constraints, and externalities related to financial infrastructures that foster market liquidity. The paper discusses how these various features have been introduced in the most recent literature on global imbalances. One aspect that may require further examination is the role of fi nancial market liquidity as a “public good externality”: in the absence of appropriate provision of such a public good in emerging economies, reserve accumulation may be seen as an attempt to import the “public services” benefi ts of holding liquid “risk-free” assets. This may in turn possibly result in a form of “congestion” if US dollar reserve accumulation outpaces the issuance of US Treasuries or equivalent securities. Large reserve holders have thus turned to a wider range of asset classes, including asset-backed securities whose liquidity has all but vanished in the course of recent fi nancial market turbulences. These developments could therefore affect the fi nancing conditions of the US current account deficit, and undermine some of its structural determinants.