Managing the New Global Imbalances

The financial crisis and the resulting global downturn have unwound some of the old global imbalances. For example, U.S. household consumption as a proportion of income has fallen; Chinese government spending relative to GDP has increased. Nevertheless, the economic turmoil may give rise to new patterns of global imbalances.

Governments’ ability and need to provide bank bailouts and fiscal stimulus have often depended on the size of their financial industry and the size of the national debt, rather than on the magnitude of previous global imbalances that required to be corrected. The severity of national recessions, along with the associated changes in trade flows and capital movements, have depended in part on countries’ different degrees of export dependence, energy production capacities and their past financial regulations.

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These differences may generate new imbalances between countries with relatively large and relatively small financial sectors, raw-material-producing and raw-material-consuming countries, and relatively open and closed economies.

In the absence of proactive policy responses, what are the new global imbalances likely to be? How should monetary, fiscal, trade, structural and welfare policies of countries around the world respond to the prospect of new imbalances? What exchange rate regimes would be useful to prevent the new imbalances from arising?