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Discussion Paper Details

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Title: Does the Current Account Still Matter?

Author(s): Maurice Obstfeld

Publication Date: March 2012

Keyword(s): Current account, External adjustment problems, Financial stability, Global imbalances, Gross financial flows, Intertemporal budget constraint and Net international investment position

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: Do global current account imbalances still matter in a world of deep international financial markets where gross two-way financial flows often dwarf the net flows measured in the current account? Contrary to a complete markets or 'consenting adults' view of the world, large current account imbalances, while very possibly warranted by fundamentals and welcome, can also signal elevated macroeconomic and financial stresses, as was arguably the case in the mid-2000s. Furthermore, the increasingly big valuation changes in countries? net international investment positions, while potentially important in risk allocation, cannot be relied upon systematically to offset the changes in national wealth implied by the current account. The same factors that dictate careful attention to global imbalances also imply, however, that data on gross international financial flows and positions are central to any assessment of financial stability risks. The balance sheet mismatches of leveraged entities provide the most direct indicators of potential instability, much more so than do global imbalances, though the imbalances may well be a symptom that deeper financial threats are gathering.

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Bibliographic Reference

Obstfeld, M. 2012. 'Does the Current Account Still Matter?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8888