Global Imbalances - Recent Developments and Prospects (Bernanke 2007)

Investment rates in the industrial countries which i

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investment rates in the industrial countries, which I noted earlier, and it is also consistent, more generally, with the recovery of domestic demand growth in Europe, Japan, and other parts of the industrial world. In summary, economic growth over the past few years, especially in industrial countries, has apparently been sufficient to increase the net demand for saving and thus to raise global real interest rates somewhat. Once again, however, I do not want to rely exclusively on this line of explanation for the behavior of long-term real interest rates, as other factors have no doubt been relevant. In particular, term premiums appear recently to have risen from what may have been unsustainably low levels, in part because of the greater recent volatility in financial markets and investors' demands for increased compensation for risk-taking. Are Current Account Imbalances a Problem? This analysis of the sources of global imbalances does not address the critical normative question: Are the current account imbalances that we see today a problem? Not everyone would agree that they are, for several reasons. First, these external imbalances are to a significant extent a market phenomenon and, in the case of the U.S. deficit, reflect the attractiveness of both the U.S. economy overall and the depth, liquidity, and legal safeguards associated with its capital markets. 9 Of course, some foreign governments have intervened in foreign exchange markets and invested the proceeds in U.S. and other capital markets, which most likely has led to greater imbalances than would otherwise exist. But the supply of capital from foreign governments is not as large as that from foreign private investors. From 1998 through 2001, even as the U.S. current account deficit widened substantially, official capital flows into the United States were quite small. During the years 2002 through 2006, net official capital inflows picked up substantially but still corresponded to less than half (47 percent) of the U.S. current account deficit over the period. On a gross basis, during the same period, private foreign inflows were three times official capital flows. 10 Moreover, even public investors are motivated to some extent by the attractions of the U.S. economy and U.S. capital markets. Second, current account imbalances can help reduce tendencies toward recession, on the one hand, or overheating and inflation, on the other. 11 During the late 1990s, for example, the developing Asian economies that had experienced financial crises and consequent collapses in domestic investment benefited from being able to run trade surpluses, which helped strengthen aggregate demand and employment. During that same period, the trade deficits run by the United States allowed domestic demand to grow strongly without creating significant inflationary pressures.
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