Working Paper: CEPR ID: DP7693
Authors: Olivier J. Blanchard; Gian Maria Milesi-Ferretti
Abstract: 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.
Keywords: current account; investment; portfolio choice; saving
JEL Codes: E21; E22; F32; F33; F36; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| significant changes in saving and investment patterns (E21) | reduction in global imbalances (F32) |
| lack of policy intervention (F68) | sustained global imbalances (F65) |
| lack of policy intervention (F68) | potential economic instability (F65) |
| domestic policy frameworks (H53) | economic behavior (D22) |
| improving governance and social safety nets (O17) | reduction in excessive saving (D14) |
| large current account deficits (F32) | significant economic downturns (F44) |