Excessive Reserve Accumulation and International Trade Balances
Note: The author thanks Jared Nolan for research assistance.
In a recent policy brief, my colleague Joseph Gagnon (2012) argued that widespread currency manipulation by many countries in recent years has led to a reduction in the US current account balance by about 4 percent of GDP (about $600 billion annually). Subsequently C. Fred Bergsten and Joseph Gagnon (2012) wrote more conservatively that an end to all currency intervention would reduce the US trade deficit by a range of $150 billion to $300 billion annually (1 to 2 percent of GDP). This note examines this issue from an alternative perspective that focuses on the period 2007–11 and incorporates specific trade-partner patterns. The resulting estimate is toward the lower end of the Bergsten-Gagnon range: an adverse impact of about $175 billion annually, or 1.1 percent of GDP.
How Much Excess Reserves Buildup?
The calculations here focus on the group of 34 major economies (with the euro area as one economy) included in the SMIM (symmetric matrix inversion method) model used to calculate fundamental equilibrium exchange rates (Cline 2008; Cline and Williamson 2012). These 34 economies accounted for 91.9 percent of world GDP at market exchange rates in 2011, as well as 91 percent of world reserves (IMF 2012a, b). Table 1 reports reserve levels in 2007 and in 2011 for the 34 SMIM economies, along with corresponding level of imports of goods and services, current account balances as percentages of GDP, and GDP levels.