Executive Directors broadly agreed with the findings of the External Sector Report and its policy recommendations. They noted that global current account surpluses and deficits have remained broadly unchanged in recent years. At the same time, the concentration of excess imbalances in advanced economies has increased, on both the surplus and deficitsides, amid a widening of creditor and debtor positions. Directors noted with concern the projected continuation of this trend under baseline policies.
Directors cautioned that, absent effective automatic
decline, largely offset by a rising surplus in Japan—against the backdrop of a depreciating yen—a further increase in current account balances of euro area debtor countries, and a resurgence of surpluses in oil-exporting countries on the back of recovering oil prices. On the deficitside, the United States continued to be the main global borrower, accompanied by growing current account deficits in some emerging market economies (Argentina, India, Turkey). These deficits were partially offset by smaller deficits in the United Kingdom—supported by further sterling
Mr. Gian M Milesi-Ferretti and Mr. Olivier J Blanchard
This chapter analyses various reasons for global imbalances and ways to tackle these issues. Current account balances reflect a plethora of macroeconomic and financial mechanisms. The overall assessment is that the pre-crisis policy advice and the conclusions from the Multilateral Consultations still largely hold. Namely, it is important to address domestic and systemic distortions. It is recommended to increase private and public US saving. The private part has largely taken place. The public part will have to take place over time. This will be good for the United States and help global rebalancing. In the fallout from the financial crisis, the adjustment process of global imbalances has started. However, stopping in midstream is dangerous—while imbalances are smaller than they used to be, the world economy is fragile. Failure to act on the remaining domestic and systemic distortions that caused imbalances would threaten the nascent recovery.
depth of the crisis. Similarly, low investment in Japan reflected a deep recession, which in turn was related to longer-term failures of dealing with the aftermath of the real estate bubble earlier in the decade. In sum, while perceptions of a tech boom turned out to be optimistic, imbalances were largely “good,” reflecting the reallocation of capital in response to perceived differences in profitability.
8.3.2. Declining U.S. Saving, 2001–04
The picture changed in the early 2000s. On the deficitside, the U.S. current account deficit averaged 1.4 percent of
The External Sector Report presents a methodologically consistent assessment of the exchange rates, current accounts, reserves, capital flows, and external balance sheets of the world’s largest economies. The 2018 edition includes an analytical assessment of how trade costs and related policy barriers drive excess global imbalances.
1. The 2018 External Sector Report (ESR) discusses the evolution of and outlook for global external balances and provides an overview of the external assessments of a globally representative set of economies for 2017. This overview complements the assessments of external balances of 30 systemic economies detailed in the accompanying Individual Economy Assessments, providing a global view, identifying global patterns and discussing potential policies to address excess imbalances from a multilateral perspective (see also Box 1). The report is organized as follows: Section II documents recent trends in external flows (that is, current account balances), stock positions (that is, international investment positions) and exchange rates. Section III presents the normative assessment of external balances (see key definitions in Box 1) and Section IV discusses the outlook and policy recommendations. In light of the material developments since the end of 2017, the report pays particular attention to the outlook and risks stemming from excess external imbalances and related policies. Finally, Section V discusses the potential impact of trade costs (frictions and policy barriers) on external balances, and argues in favor of reviving liberalization efforts, especially in services and investment, where barriers remain relatively large.
1. IMF tools to assess external positions in a multilaterally-consistent fashion have evolved over time. Initial assessments, based on the Consultative Group on Exchange Rate Issues (CGER) framework, focused on the exchange rates of key advanced economies, although these evolved to include a broader range of measures of a country’s external position and wider country coverage. The existing External Balance Assessment (EBA) framework was launched in 2012, with current account and real exchange rate (REER) models that are used as numerical inputs into the external sector assessment conducted by IMF staff. The key innovation of the EBA framework consisted of expanding the set of policy variables, and defining the concept of current account “norms” as current account levels that correspond to policies at their desired levels. The EBA models also helped highlight the role of policy distortions, and introduced an internal collaborative exercise to arrive at multilaterally consistent staff assessments.
This section discusses external developments since 2017, as well as prospects for the evolution of external balances and risks emanating from them. Policy actions to address excess external imbalances are discussed, both from an individual and multilateral perspective.
23. Conventional economic wisdom holds that the drivers of external current account balances are primarily macroeconomic in nature: the current account represents the excess of national saving over investment, whose drivers in turn are macroeconomic. The IMF’s approach to assessing imbalances reflects this conventional wisdom and the vast theoretical and empirical literature on this topic. Current accounts in the EBA model are pinned down by macroeconomic fundamentals, including demographics, income per capita, and growth prospects, as well as by domestic policies.
The external sector assessments use a wide range of methods, including the External Balance Assessment (EBA) developed by the IMF’s Research Department to estimate desired current account balances and real exchange rates (see IMF Working Paper WP/13/272 for a complete description of the EBA methodology and Annex I of the 2015 External Sector Report for a discussion of more recent refinements). This year, as is done periodically, the EBA models were refined to reflect insights gained since the last round of changes. Refinements aimed at better capturing the role that certain fundamentals (demographics, institutions and potential current account measurement biases), macroeconomic policies (foreign exchange intervention and credit excesses) and other structural features could play in driving current account dynamics. A full description of the refinements can be found in the 2018 ESR Technical Supplement.