By Ambrogio Cesa-Bianchi, Dan Christen, Peter Denton, Aydan Dogan, Will Dison, Ida Hjortsoe, Mark Joy, Jeremy Martin, Daniel Ostry, Roger Vicquery and Simon Whitaker
Persistent excess current account imbalances pose serious risks to the global economy. Anaemic global growth could stall, or worse, if trade tensions, in response to these imbalances, persist.
This paper takes a fresh analytical look at the drivers and consequences of global imbalances. It finds the following: (i) persistent excess imbalances are driven primarily by domestic macroeconomic factors, consistent with the literature; (ii) however, industrial policy, which there has been a resurgence of globally, can have second-order impacts on the current account over the short to medium term under certain conditions; (iii) it may also have impacts over the longer term, but our collective understanding of these impacts, and their spillovers, is partial; (iv) global external balance sheets show vulnerabilities that could interact with other global financial stability risks in disorderly unwind scenarios.
Reflecting on these findings the paper offers the following policy recommendations: (a) an orderly and symmetric rebalancing would reduce risks to growth and financial stability; (b) this would require reform of the multilateral stewardship of imbalances; (c) surveillance in any case needs to be strengthened; (d) closer collaboration on global governance of trade policy will be needed; (e) finally, efforts to improve traction of surveillance will be needed, especially with the largest contributors to global imbalances.
Rethinking global imbalances: drivers, risks, and policy priorities