Global Imbalances: Are They Back, Should We Worry, and What Should We Do About Them?

In this paper we make three points about global imbalances. First, we show that the imbalances problem, despite having retreated during the crisis, has not gone away. Second, imbalances of the magnitude we are currently witnessing reflect unsustainable levels of leverage and heighten vulnerability to disruptive current account reversals. Third, more forceful steps are needed to raise national saving relative to income in the United States and other deficit economies and to raise spending in surplus countries like China. Real exchange rate changes will be required as part of this adjustment. Our conclusions are informed by a cross country panel analysis of over a 100 countries. The empirical results confirm the importance of budget balances and household leverage while discounting the impact that financial development will have on Chinese surpluses.