Explaining Global Imbalances : The Role of Central Bank Intervention and the Rise of Sovereign Wealth Funds

Neoclassical economic theory views current account imbalances as the result of (individual) decisions to save more than to invest domestically, in line with the loan-able funds doctrine. Monetary analysis in the Keynesian tradition rejects such approaches and emphasizes that a country's net savings are the result, not the cause, of net selling goods and services to foreigners. The latter, in turn, depends on global demand patterns and absolute advantages between countries. We complement this Keynesian approach taking a closer look at the financial account of the balance of payments: A necessary condition for countries to net sell goods and services to foreigners is the willingness of domestic sector(s) to accumulate net foreign assets. While previous analysis of global imbalances has partially discussed the role of central banks' reserve accumulation it has failed to incorporate the macroeconomic role of sovereign wealth funds (SWFs). We analyze eight surplus countries` external positions and find that the public sector typically purchases and manages significant amounts of foreign assets via both central banks and SWFs. We conclude that the magnitude and persistence of current account imbalances over the last decades would not have been possible without massive official net purchases of foreign assets. In a final step, we consider the particular case of Switzerland where, contrary to other surplus countries, public sector purchases of foreign assets were longtime absent, yet set in massively after 2008