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Global imbalances – should we be concerned?
Global imbalances are once again on the international economic agenda. Governor Signe Krogstrup and Assistant Governor Thomas Harr have written a chapter titled: Global imbalances then and now: Should we be concerned? published in the Centre for Economic Policy Research’s Paris Report on global imbalances.
Global imbalances are once again on the international economic agenda
In some ways, this echoes the debate ahead of the great financial crisis (GFC) in 2008, but there are important differences.
Today, the Centre for Economic Policy Research (CEPR) published its Fourth Paris Report: The New Global Imbalances. The report brings together analyses by a number of authors. It takes a closer look at how global imbalances have once again become central at a time marked by rising geopolitical tensions and changing trade dynamics, with potential implications for financial stability.
Governor Signe Krogstrup and Assistant Governor Thomas Harr have contributed to the report with a chapter titled: Global imbalances then and now: Should we be concerned? The chapter analyses developments in global imbalances since the GFC and their significance for capital flows and global financial stability.
Historically, global imbalances have been driven, on the one hand, by higher consumption and investment in deficit countries, and, on the other hand, by rising savings in surplus countries. The chapter focuses in particular on the role of savings.
Before the GFC, official savings were largely invested in safe assets, contributing to declining risk-free interest rates and more accommodative financial conditions—in line with the so-called “saving glut” hypothesis. Today, saving patterns have changed. In surplus countries, savings have increasingly shifted from official to private savings, and capital is now channelled through financial institutions outside the traditional banking sector. This development may increase demand for riskier assets and compress risk premia. At the same time, the decline in risk-free rates may be less pronounced than in the period before the financial crisis. Together with the expansion of countries’ net international investment positions, this may imply new risks to global financial stability. These risks can be mitigated by stronger fiscal sustainability, sufficient capital and liquidity in financial institutions, and greater transparency in cross-border exposures.
Read the full report on CEPR’s website
Read Governor Signe Krogstrup’s and Assistant Governor Thomas Harr’s chapter here.
What are global imbalances?
Some countries and regions save more than they invest (e.g., the EU). Other countries do the opposite, i.e., they invest and consume more than they save (e.g., the US). Some have a trade surplus. Their exports are greater than their imports (e.g., the EU). Others, by contrast, have a deficit (e.g., the US). Globally, everything should balance out. One country’s export is, in principle, another country’s import. But at the country level, there can be surpluses or deficits over longer periods. And overall, these global imbalances affect the capital flows we see between countries and regions.