1. 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.

2. 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

3. Rubric The growing importance of international asset trade relative to trade in goods and services US current account component flows (% of GDP) US gross financial flows (% of GDP) Source: Lane and Milesi Ferretti Source: OECD

4. Rubric The growing importance of international asset trade relative to trade in goods and services IE current account component flows (% of GDP) IE gross financial flows (% of GDP) Source: Lane and Milesi Ferretti Source: OECD

5. 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

6. Rubric A case in point: the role of the euro area in global imbalances Global imbalances (% of world GDP) Source: IMF WEO, ECB calculations

7. Rubric However, the euro area developments also show the importance of current account balances Euro area current account imbalances (% of GDP) Source: IMF WEO

8. Rubric While in emerging market economies gross financial flows remain less important Korea current account component flows (% of GDP) Korea gross financial flows (% of GDP) Source: Lane and Milesi Ferretti Source: OECD

9. 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

10. Rubric Looking ahead: global imbalances remain large External imbalances (% of GDP) Source: IMF WEO, ECB Staff Calculations

11. 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 %): Sources: ECB staff calculations based on IMF data Australia51China63 Brazil74Indonesia55 Canada42United States73

12. 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

13. Rubric Thank you for your attention

14. Rubric Background

15. Rubric And rebalancing appears to be mostly cyclical China United States 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).

16. Rubric Importance of oil External imbalances (% of GDP; with and without oil trade balance Source: IMF WEO, ECB Staff Calculations