A Model on Global Imbalances

This paper examines whether the international currency system has contributed to global imbalances. We present an analytical framework concerning two sovereign currencies as a reserve currency system. We find that the current international monetary system is an important reason for global economic imbalances. Within the current international monetary system, it is difficult to solve the problem of reserve currency countries' current account deficits and global imbalances by adjusting the relative price, interest rates and exchange rates. Moreover, our model shows that the current account surplus of a reserve currency country could alleviate the current account deficit of the other one.