Current Accounts and Global Adjustment: The Long and Short of It
Article first published online: 18 MAR 2011
Copyright © 2011 Morgan Stanley
Journal of Applied Corporate Finance
Volume 23, Issue 1, pages 32–42, Winter 2011
How to Cite
Pradhan, M. and Taylor, A. M. (2011), Current Accounts and Global Adjustment: The Long and Short of It. Journal of Applied Corporate Finance, 23: 32–42. doi: 10.1111/j.1745-6622.2011.00312.x
- Issue published online: 18 MAR 2011
- Article first published online: 18 MAR 2011
- Cited By
Global rebalancing is underway, but still quite a distance from being done. Current account imbalances have been a persistent feature of the global economy for over 100 years, especially during the two eras of globalization—the period 1870 to 1914 and the present. Such imbalances have reflected underlying imbalances between savings and investment as well as the prevailing international monetary regime.
One important lesson from the past 150 years is that capital flows play an important role in funding global investment opportunities—a role that would be harmed if policy makers responded to the perceived threat of global imbalances by imposing any sort of cap. During those periods when capital flows have been relatively unhindered, investment opportunities around the world have been financed by capital flows. Such flows have financed the growth of many erstwhile “emerging market” economies, including the U.S. in the early part of this century. And global capital flows are doing much the same for many emerging markets today, even though purchases of reserves by some countries have been offsetting inbound private capital flows in the aggregate.
The other main lesson of history is that imbalances do not last forever, and tend to lead to adjustments and reversals. Experience shows that such adjustments are much easier for surplus countries than for deficit countries.