Crisis and Global Imbalances: the Fragility of the Current International Monetary System

Global structural factors both monetary and real played a prominent role in the burst of the subprime crisis: 1) the so-called Bretton Woods II international monetary system; 2) the reduction of US real investment return compared with competing countries. We develop a two-country partial equilibrium model to analyze the impact of these factors and macroeconomic policies on the US current account and asset prices. The excess savings of U.S. nonfinancial business sector from 2000-2001 has undermined the stability of the Bretton Woods II system. Accommodative US monetary and fiscal policies have mitigated the imbalances but in the long term structural factors prevailed. Only a recovery of the US real capital profitability can ensure long run coexistence between the present model of global development and current international monetary system.