On the centrality of the current account in international economics

The current account occupies a central position in international economics and policy debates. Indeed, in G20 policy debates the term “global imbalances” is treated as almost synonymous with “current account imbalances.” Current account imbalances do matter and they can be a problem. But this speech argues that this centrality is not that helpful in understanding how the global economy works, especially in a world of free and huge capital flows. And it may even lead to the wrong policy prescriptions, including not paying sufficient attention to potentially more disruptive financial imbalances. A key reason is that, analytically, the current account is asked to shed light on issues for which it is ill-suited, such as the amount of financing a country gets from, or provides to, others, the direction of that financing (who lends to whom), financial instability and the determination of equilibrium interest rates through the familiar saving-investment approach.