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Does the Current Account Still Matter?

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  • Obstfeld, Maurice

Abstract

Do global current account imbalances still matter in a world of deep international financial markets where gross two-way financial flows often dwarf the net flows measured in the current account? Contrary to a complete markets or 'consenting adults' view of the world, large current account imbalances, while very possibly warranted by fundamentals and welcome, can also signal elevated macroeconomic and financial stresses, as was arguably the case in the mid-2000s. Furthermore, the increasingly big valuation changes in countries’ net international investment positions, while potentially important in risk allocation, cannot be relied upon systematically to offset the changes in national wealth implied by the current account. The same factors that dictate careful attention to global imbalances also imply, however, that data on gross international financial flows and positions are central to any assessment of financial stability risks. The balance sheet mismatches of leveraged entities provide the most direct indicators of potential instability, much more so than do global imbalances, though the imbalances may well be a symptom that deeper financial threats are gathering.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8888.

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Date of creation: Mar 2012
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Handle: RePEc:cpr:ceprdp:8888

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Keywords: Current account; External adjustment problems; Financial stability; Global imbalances; Gross financial flows; Intertemporal budget constraint; Net international investment position;

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References

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Citations

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Cited by:
  1. Robert N. McCauley & Guonan Ma, 2013. "Global and Euro Imbalances: China and Germany," SUERF 50th Anniversary Volume Chapters, SUERF - The European Money and Finance Forum.
  2. Taylor, John B., 2013. "International monetary coordination and the great deviation," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 463-472.
  3. Alan M. Taylor, 2012. "External Imbalances and Financial Crises," NBER Working Papers 18606, National Bureau of Economic Research, Inc.
  4. Aizenman, Joshua & Jinjarak, Yothin, 2013. "Real Estate Valuation, Current Account, and Credit Growth Patterns Before and After the 2008–2009 Crisis," ADBI Working Papers 429, Asian Development Bank Institute.
  5. Calderon, Cesar & Kubota, Megumi, 2012. "Gross inflows gone wild : gross capital inflows, credit booms and crises," Policy Research Working Paper Series 6270, The World Bank.
  6. Pancaro, Cosimo, 2013. "Current account reversals in industrial countries: does the exchange rate regime matter?," Working Paper Series 1547, European Central Bank.
  7. Calderon, Cesar & Kubota, Megumi, 2014. "Ride the wild surf : an investigation of the drivers of surges in capital inflows," Policy Research Working Paper Series 6753, The World Bank.
  8. Lemelin, André & Robichaud, Véronique & Decaluwé, Bernard, 2013. "Endogenous current account balances in a world CGE model with international financial assets," Economic Modelling, Elsevier, vol. 32(C), pages 146-160.
  9. Curcuru, Stephanie E. & Thomas, Charles P. & Warnock, Francis E., 2013. "On returns differentials," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 1-25.
  10. Bonatti, Luigi & Fracasso, Andrea, 2013. "Hoarding of international reserves in China: Mercantilism, domestic consumption and US monetary policy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1044-1078.
  11. Linda S. Goldberg, 2013. "Banking globalization, transmission, and monetary policy autonomy," Staff Reports 640, Federal Reserve Bank of New York.

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