Global imbalances and financial stability

Much of the policy debate in coming years will hinge on two questions: have global imbalances contributed to the financial crisis? Is a reduction in global imbalances a prerequisite to ensuring global financial stability? In light of available research and analysis, it is reasonable to argue that common causes likely lay behind both the crisis and global imbalances. They include heterogeneous saving preferences, asymmetric financial development across countries engaged in global financial markets, and the undersupply of liquid and safe assets at the aggregate level. Looking ahead, the international community has to strike the right balance between, on the one hand, countries’ legitimate sovereignty over monetary, capital account, and exchange rate policies and, on the other hand, intensified interdependencies, the global system’s increased complexity, and diverging economic prospects across countries. Rebalancing world demand will no doubt be a gradual, long-run process. To help foster an orderly unwinding, all countries need to ensure that their policies do not create further distortions in the global economy. Several improvements to the international monetary system could be considered to help reduce incentives for distortive policies.