The Financial Role of East Asian Countries in Global Imbalances: An Econometric Assessment of Developments After the Global Financial Crisis

The central objective of our paper is to empirically assess how global imbalances, have evolved since the global financial crisis of 2008–2009. More specifically, we examine how the portfolio investment positions of major East Asian countries in US financial markets — equities, debt securities, and bank lending — changed after the crisis. Our econometric analysis, based on the gravity model to identify the determinants of foreign portfolio investment into the US, finds that the "over-investment" of most East Asian countries remained substantial since the global crisis, especially in equities and long term debt securities. That is, even after the global crisis, most East Asian economies continue to hold excessive amounts of US securities, but the degree of over-investment appears to have declined for some economies in holdings of certain type of securities. We also find that East Asian countries over-invest in US financial markets largely due to excessive savings and foreign exchange reserves.