Global imbalances and current account imbalances

As the global economy gradually recovers from the severe recession, the possible risks of unsustainable global imbalances are receiving renewed attention. In assessing global imbalances, it is important to avoid excessively focusing on current account imbalances per se. Rather, the focus should be on the root causes of the imbalance and whether they may become sources of unsustainable financial imbalances. The recent financial crisis, as well as Japan’s past experience in the 1980s, highlight the importance of information which cannot necessarily be obtained from current account statistics. Unsustainable financial imbalances can be better captured through information such as the build-up of leverage, gross cross-border capital flows, risk pricing in financial markets, and the extent of currency and maturity mismatches in the financial system. Through careful assessment of such elements central banks and other authorities will be able to assess whether current account imbalances are a reflection of the build-up of domestic financial imbalances. In formulating macroeconomic policy, the traditional emphasis was to ensure domestic stability or to put one’s house in order. However, with the deepening of globalisation, the simple sum of each country’s policy action may not necessarily achieve an optimal outcome at the global level. It has become ever more important for countries to review the spillover effects of their policies which will also reverberate back to each country through economic and financial interlinkages.