Global Imbalances: Do They Matter?
This article reviews the recent literature on global imbalances and discusses the policy implications of the various theories that have been advanced to explain their unprecedented increase. Most of these theories fit the stylized facts, namely, the steady increase in the U.S. current account deficit, the shift to a surplus position of the developing countries, and the low nominal and real interest rates globally. The "low U.S. savings” theory—reflecting the increase in the fiscal deficit and in housing wealth—views the current account deficit as the result of fiscal and monetary policy decisions in the United States that need to be urgently reversed to prevent a crash landing. Other theories however, focusing on developments outside the United States, portfolio balance effects, or previously neglected benign factors, do not yield such a doomsday scenario. It is relevant to note that there is no historical precedent of disorderly exchange rate adjustment in industrial countries that keep inflation under control (Croke, Kamin, and Leduc 2005). Concerns over a disorderly unwinding of global imbalances therefore appear exaggerated. This view, prevalent among market participants and several prominent academics, has not been widely embraced by policymakers.