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VIDEO & AUDIO

Event materials

 by Luis Cubeddu and Gustavo Adler

SUMMARY

Global imbalances have fallen from pre-Global Financial crisis peaks, yet levels are still comparatively high to the 90s and divergences are quite large. The composition of imbalances has shifted away from emerging economies to advanced economies. Following the IMF External Sector Report published in July, this event discussed the current IMF methodology for assessing external imbalances, risks from the current composition of imbalances and potential policy responses to correct them.
Only one third of current global imbalances are deemed excessive
A starting point in the discussion was that while global imbalances can point to risks and vulnerabilities in the economy, not all imbalances are undesirable. This is why the IMF methodology relies on a multidimensional approach that combines judgment with a numerical assessment. Empirical models are built to map countries’ fundamentals, features and policies and link them to the current account and/or the Real Effective Exchange Rate (REER).

Currently two thirds of the global imbalances are deemed to be desirable and appropriate. Between 2013 and 2016 excessive imbalances have remained broadly unchanged. The composition, however, has changed from emerging economies to advanced economies, such as the United States and the United Kingdom.

Persistence in excess imbalances suggest that the adjustment mechanisms in place appear to be weak

It is necessary to identify the policy gaps underlying the excess imbalances. The IMF report shows that fiscal policy plays a key role in driving imbalances, especially in countries with large Current Account (CA) gaps such as Thailand, Germany and Korea. On the other hand, foreign exchange intervention has played a very limited role - over the last 3 years the picture has changed dramatically and there are very few countries with significant reserve accumulation.

When the exchange rate moves very rapidly, the effects take some time to materialise in the CA due to lag effects. This is the case for Mexico and China, and it may also be the case for the United Kingdom – the impact of Brexit in the UK’s external position is not visible as the depreciation has not yet fed into the country’s current account.

The concentration of excess deficits in a few advanced economies shows that currently excess deficits are in the countries that can finance them. However, there should not be complacency towards the associated risks: the risk of protectionist actions and of growing divergences in stock positions, implying disruptive adjustments down the road.
Structural reforms are the main way to address distortions that are behind persisting imbalances. Countries such as France, Spain and Italy need to rely on fiscal and structural policies to engineer depreciation, given that they have no control over monetary policy. For Germany, a use of fiscal policy is suggested to encourage increased productivity and foster private investment while reducing the Current Account gap. This is in the interest of the country mostly given the opportunity cost of investing abroad – in a similar fashion, for many surplus countries the rates of return of domestic investment could be greater than abroad. The possibility of expanding domestic demand is another incentive. Finally, it was discussed that the capital account can also play an important role in changing the Net International Investment Position, as most EU transfers are in the capital account.
During the event, a myriad of questions were raised. For instance, it was noted that the corporate sector saves much more in surplus countries - could dividend policy, taxation or domestic capital markets help explain this behaviour? How are Current Account deficits being financed? What is the role of pension schemes? These issues should be further analysed as they can help explain the current dynamics.

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