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Global imbalances: the perspective of the Bank of England

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  • King, M.
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    Abstract

    In 2009, demand in the world’s major economies fell, relative to its pre-crisis trend, by around USD 2.5 trillion or 5 per cent of GDP. The financial crisis damaged virtually every country. Global imbalances helped to fuel the financial crisis. And today they threaten the sustainability of the recovery in global demand. Global imbalances are a reflection of today’s decentralised international monetary and financial system. All the main players around the world are rationally pursuing their own self interest. But the financial crisis has revealed that what makes sense for each player individually does not always make sense in aggregate. These actions had collective consequences. The main lesson from the crisis is the need to find better ways of ensuring the right collective outcome. Improved financial regulation will help to intermediate the flows associated with global imbalances. But the global economy will remain vulnerable to the risks associated with imbalances if they are not tackled at source. Two principles should underpin the way ahead. First, discussions should focus on the underlying disagreement about the right speed of adjustment to the real pattern of spending and hence the reduction in these imbalances. This discussion should be informed by countries’ ability to follow that path in a sustainable way. Second, many policies, in addition to changes in exchange rates, will be needed to reduce imbalances. If agreement is not reached on these two principles, at best there will be a weak world recovery; at worst, the seeds of the next financial crisis will be sown.

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    Bibliographic Info

    Article provided by Banque de France in its journal Financial Stability Review.

    Volume (Year): (2011)
    Issue (Month): 15 (February)
    Pages: 73-80

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    Handle: RePEc:bfr:fisrev:2011:15:09

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    Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
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    1. Ricardo J Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An equilibrum model of "global imbalances" and low interest rates," BIS Working Papers 222, Bank for International Settlements.
    2. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
    3. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR & CES & MSH, vol. 16(32), pages 51-82, 04.
    4. Chamon, Marcos & Prasad, Eswar, 2007. "Why Are Saving Rates of Urban Households in China Rising?," IZA Discussion Papers 3191, Institute for the Study of Labor (IZA).
    5. Hutchison, Michael M. & Noy, Ilan, 2006. "Sudden stops and the Mexican wave: Currency crises, capital flow reversals and output loss in emerging markets," Journal of Development Economics, Elsevier, vol. 79(1), pages 225-248, February.
    6. Carmen M. Reinhart, 2010. "This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises," NBER Working Papers 15815, National Bureau of Economic Research, Inc.
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