Isabel VansteenkisteSome reflections on: global imbalances – do net capital flows still matter?*

DNB workshop, Amsterdam18 March 2013

* The views expressed in this presentation do not necessarily reflect the views of the ECB and the Eurosystem.

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Introduction

The growing importance of international asset trade

The implications of the growing role of international asset trade

Does the current account still matter?

Implications for the policy debate

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The growing importance of international asset trade relative to trade in goods and services

US current account component flows (% of GDP)

-30

-20

-10

0

10

20

30

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

assets liabilities

US gross financial flows (% of GDP)

Source: Lane and Milesi Ferretti Source: OECD

-30

-20

-10

0

10

20

30

1970 1974 1978 1983 1987 1991 1996 2000 2004 2009

import exportnet transfers income paid

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The growing importance of international asset trade relative to trade in goods and services

IE current account component flows (% of GDP)

IE gross financial flows (% of GDP)

Source: Lane and Milesi Ferretti Source: OECD

-400

-300

-200

-100

0

100

200

300

400

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

assets liabilities

-150

-100

-50

0

50

100

150

200

250

1990 1992 1994 1997 1999 2001 2004 2006 2008 2011

import exportnet transfers income paid

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The consequences of the growing role international asset trade

Current account balances no longer matter under two opposite views of the

world

Under complete Arrow-Debreu asset markets, countries pool their risks. At the

extreme, idiosyncratic income movements are offset completely by net insurance

payments from abroad

Imperfections in risk sharing can reinforce each other so as to magnify

systematic risks

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A case in point: the role of the euro area in global imbalances

Global imbalances (% of world GDP)

Source: IMF WEO, ECB calculations

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

UK Oil exporters China Japan Euro area United States

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However, the euro area developments also show the importance of current account balances

-20

-15

-10

-5

0

5

10

15

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Germany Spain Greece Portugal Euro area

Euro area current account imbalances (% of GDP)

Source: IMF WEO

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While in emerging market economies gross financial flows remain less important

Korea current account component flows (% of GDP)

Korea gross financial flows (% of GDP)

Source: Lane and Milesi Ferretti Source: OECD

-80

-60

-40

-20

0

20

40

60

80

1980 1983 1986 1990 1993 1996 2000 2003 2006 2010

import exportnet tansfers income paid

-80

-60

-40

-20

0

20

40

60

80

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

assets liabilities

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Implications for the policy debate?

Current framework:

G20 Pittsburgh Leaders agreement

Pre-crisis composition of global growth was unsustainable and global demand

patterns should be rebalanced: Large deficit economies should increase

domestic savings; Large surplus economies should increase consumption

Strengthening the International Financial Regulatory System

Basel III, OTC derivatives markets, shadow banking, accounting convergence,…

Move towards a more resilient international monetary system

Coherent conclusions to guide us in the management of capital flows, common

principles for cooperation between the IMF and RFAs, and an action plan for

local currency bond markets

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Looking ahead: global imbalances remain large

External imbalances (% of GDP)

Source: IMF WEO, ECB Staff Calculations

0

1

2

3

4

1981 1985 1989 1993 1997 2001 2005 2009 2013

Start of the global financial crisis

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And rebalancing appears to be mostly cyclical

Estimates of the cyclical components in the change between 2007 and 2012 for selected G20 economies’ current account positions (in %):

Sources: ECB staff calculations based on IMF data

Australia 51 China 63

Brazil 74 Indonesia 55

Canada 42 United States 73

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Looking ahead: what should the G20 focus on?

Importance to maintain the G20 commitments and maintain the momentum

But:

Need to focus more international linkages (real and financial)

Move towards a more resilient international monetary system is a

continuous process

Need for a more integrated approach

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Thank you for your attention

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Background

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And rebalancing appears to be mostly cyclical

ChinaUnited States

Sources: ECB staff calculations based on a Bayesian framework and on 16,000 models spanning all possible combinations of macroeconomic fundamentals for each country (see Bussière et al. 2010).and IMF WEO data (April 2010).

Note: (*) The cyclical component is defined as the residual of the subtraction between actual current account and its estimated equilibrium, cleaned from a time-varying trend calculated from a Hodrick-Prescott filter (which aims to purge these residuals from factors that are not captured by the model).

-7%

-5%

-3%

-1%

1%

3%

5%

1999 2001 2003 2005 2007 2009 2011 2013(e)2015(e)

Actual Benchmark Cyclical component of CA gap*

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1999 2001 2003 2005 2007 2009 2011 2013(e)2015(e)

Actual Benchmark Cyclical component of CA gap*

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Importance of oil

External imbalances (% of GDP; with and without oil trade balance

Source: IMF WEO, ECB Staff Calculations

0

1

2

3

4

5

6

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

CA CA without oil