The resolution of global imbalances: Soft landing in the North, sudden stop in emerging markets?

The paper shows that the increase in the US current account deficit since 1997 was financed by Emerging Market economies, EMs. Since 2001 a large share of the funding was carried out by the official sector, taking mostly the form of accumulation of international reserves. The paper argues that (1) if official funding is stopped or reversed, the private sector in EMs is likely to provide offsetting funds, preventing the US to go through a Sudden Stop episode; and (2) in the unlikely event that global saving collapses, the brunt of the adjustment is likely to be borne by EMs, e.g., through Sudden Stops, and flight to quality likely to ensure the US a smooth transition, i.e., a soft landing.