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Policy Brief 07-4

Global Imbalances: Time for Action

March 2007

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The world economy faces a grave danger from the large imbalances in current account positions. Policymakers should not wait until financial markets force global adjustment. They should initiate a credible, comprehensive adjustment program to reduce the risks of a crisis, which could produce a world recession and disruptions to the global trading system. Participants in a February 2007 workshop, held in Washington and sponsored by Brussels-based Bruegel, Seoul-based Korea Institute for International Economic Policy, and Washington-based Peterson Institute for International Economics, outlined how an orderly reduction in global imbalances can be achieved. They presented estimates of the exchange rate implications of current account adjustment scenarios in which the US current account deficit narrowed to 3 percent of GDP in the medium term and the world growth rate was unchanged. Most of the adjustment would be borne by China, Japan, other Asian economies, a few high-surplus European economies not in the euro area, and the oil-exporting countries. The combined role of the smaller surplus economies in Asia and Europe (outside of the euro area) in the adjustment process will be more important than the role of either China or Japan. The adjustment would require a rebalancing of world demand with both higher saving in the United States and higher consumption in East Asia, as well as effective appreciations of the currencies of China, Japan, and other surplus countries in East Asia and Europe and bilateral appreciations against the dollar by other currencies. The problem is multilateral in nature and needs to be addressed in a multilateral context such as that potentially provided by the International Monetary Fund.

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Workshop Papers

Introduction [pdf]
John Williamson, Peterson Institute

The Target Current Account Outcomes [pdf]
John Williamson, Peterson Institute

Internal and External Current Account Balances in the Euro Area [pdf]
Alan Ahearne, Jürgen von Hagen, and Birgit Schmitz
    Comment by Desmond Lachman [pdf]

How Large a Dollar Adjustment to Reduce the US Imbalance? [pdf]
Martin Neil Baily, Peterson Institute
    Comment by Barry Eichengreen [pdf]

Sustainable Adjustment of Global Imbalances [pdf]
Ray Barrell, Dawn Holland, and Ian Hurst

World Consistent Equilibrium Exchange Rates [pdf]
Agnès Bénassy-Quéré, Amina Lahrèche-Révil, and Valérie Mignon 
    Comment by Bernd Schnatz [pdf]
Estimating Reference Exchange Rates [pdf]
William R. Cline, Peterson Institute

Will Japan Turn to a Deficit Country in the Near Future? [pdf]
Koichi Hamada

Methodology for CGER Exchange Rate Assessments [pdf]
Jaewoo Lee, Gian Maria Milesi-Ferretti, and Luca Ricci

BEER Estimates and Target Current Account Imbalances [pdf]
Ronald MacDonald and Preethike Dias 
    Comment by Bernd Schnatz [pdf]

Oil and Global Adjustment [pdf]
Brad Setser
    Comment by Trevor Reeve [pdf]

GSDEER and Trade Elasticities [pdf]
Thomas Stolper and Monica Fuentes 
    Comment by Bernd Schnatz [pdf]

The Exchange Rate Adjustment in the Course of Global Rebalancing: The Case of Korean Won [pdf]
Doo Yong Yang

Global Imbalances: China’s Perspective [pdf]
Yu Yongding

Concluding Remarks

Comments [pdf]
Yung Chul Park

Concluding Speech [pdf]
Yu Yongding


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