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Isabel Vansteenkiste Some reflections on: global imbalances – do net capital flows still matter?* DNB workshop, Amsterdam 18 March 2013 * The views expressed in this presentation do not necessarily reflect the views of the ECB and the Eurosystem. Rubric 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 Rubric The growing importance of international asset trade relative to trade in goods and services US gross financial flows (% of GDP) US current account component flows (% of GDP) 30 30 assets import net transfers liabilities export income paid 20 20 10 10 0 0 -10 -10 -20 -20 -30 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 -30 1970 1974 1978 1983 1987 1991 1996 2000 2004 2009 Source: Lane and Milesi Ferretti Source: OECD Rubric The growing importance of international asset trade relative to trade in goods and services IE gross financial flows (% of GDP) IE current account component flows (% of GDP) 250 400 assets liabilities import net transfers export income paid 300 200 200 150 100 100 0 50 -100 0 -200 -50 -300 -100 -400 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 -150 1990 1992 1994 1997 1999 2001 2004 2006 2008 2011 Source: Lane and Milesi Ferretti Source: OECD Rubric 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 Rubric A case in point: the role of the euro area in global imbalances Global imbalances (% of world GDP) 2.50 UK Oil exporters China Japan Euro area United States 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: IMF WEO, ECB calculations Rubric However, the euro area developments also show the importance of current account balances Euro area current account imbalances (% of GDP) 15 Germany Spain Greece Portugal Euro area 10 5 0 -5 -10 -15 -20 97 98 Source: IMF WEO 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Rubric While in emerging market economies gross financial flows remain less important Korea gross financial flows (% of GDP) Korea current account component flows (% of GDP) 80 80 assets liabilities import net tansfers export income paid 60 60 40 40 20 20 0 0 -20 -20 -40 -40 -60 -60 -80 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 -80 1980 1983 1986 1990 1993 1996 2000 2003 2006 2010 Source: Lane and Milesi Ferretti Source: OECD Rubric 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 Rubric Looking ahead: global imbalances remain large External imbalances (% of GDP) 4 Start of the global financial crisis 3 2 1 0 1981 1985 1989 1993 Source: IMF WEO, ECB Staff Calculations 1997 2001 2005 2009 2013 Rubric 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 %): Australia 51 China 63 Brazil 74 Indonesia 55 Canada 42 United States 73 Sources: ECB staff calculations based on IMF data Rubric 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 Rubric Thank you for your attention Rubric Background Rubric And rebalancing appears to be mostly cyclical China United States 5% Actual Benchmark Cyclical component of CA gap* 12% Actual Benchmark Cyclical component of CA gap* 10% 3% 8% 1% 6% -1% 4% 2% -3% 0% -5% -2% -7% -4% 1999 2001 2003 2005 2007 2009 2011 2013(e)2015(e) 1999 2001 2003 2005 2007 2009 2011 2013(e)2015(e) 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). Rubric Importance of oil External imbalances (% of GDP; with and without oil trade balance 6 CA CA without oil 5 4 3 2 1 0 80 82 84 86 88 Source: IMF WEO, ECB Staff Calculations 90 92 94 96 98 00 02 04 06 08 10 12