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December 22, 2009 SPN/09/29

Global Imbalances: In Midstream?

Olivier Blanchard and Gian Maria Milesi-Ferretti

I N T E R N A T I O N A L

M O N E T A R Y

F U N D

INTERNATIONAL MONETARY FUND Research Department Global Imbalances: In Midstream? Prepared by Olivier Blanchard and Gian Maria Milesi-Ferretti1 Authorized for Distribution by Olivier Blanchard December 22, 2009

Disclaimer: The views expressed herein are those of the author(s) and should not be attributed to the IMF, its Executive Board, or its management.

Before the crisis, there were strong arguments for reducing global imbalances. As a result of the crisis, there have been significant changes in saving and investment patterns across the world and imbalances have narrowed considerably. Does this mean that imbalances are a problem of the past? Hardly. The paper argues that there is an urgent need to implement policy changes to address the remaining domestic and international distortions that are a key cause of imbalances. Failure to do so could result in the world economy being stuck in “midstream,” threatening the sustainability of the recovery. JEL Classification Numbers: E21, E22, F32, F33, F36, F41 Keywords: Current account deficits, saving, investment, portfolio choice. Authors’ E-mail Addresses: oblanchard@imf.org ; gmilesiferretti@imf.org

1

One of the series of “Seoul papers” on current macro and financial issues. We are grateful to Caroline Atkinson, Nicoletta Batini, Tam Bayoumi, Christian Broda, Matthieu Bussière, Paul Cashin, Nigel Chalk, Menzie Chinn, Stijn Claessens, Charles Collyns, Carlo Cottarelli, Irineu de Carvalho Filho, Uri Dadush, Jörg Decressin, Kemal Dervis, Nicolas Eyzaguirre, Stan Fischer, Charles Kramer, John Lipsky, Enrique Mendoza, Ashok Mody, Jonathan Ostry, Jean Pisani-Ferry, Hélène Rey, David Robinson, Antonio

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