IMF spotlights new thinking on capital flows

• Pages: 354-355

Page 354

Capital flows are now at the heart of the global financial system and, because of the Fund's new strategic emphasis on multilateral surveillance, of keen interest to the IMF. Unsurprisingly, capital flows were the theme of this year's Jacques Polak Annual Research Conference. In his opening remarks to the seventh annual conference, IMF Research Director Raghuram Rajan said the topics sorted themselves into three main categories: global imbalances; the role of international capital in promoting growth, entrepreneurship, and institutions; and whether foreign capital heightens risk and volatility.

Global imbalances were the focus of the keynote Mundell-Fleming address by Olivier Blanchard (Massachusetts Institute of Technology (MIT)). The U.S. current account deficit dominates the numbers and the news, he said, while China and some other Asian countries are running large surpluses. But the problem of large current account deficits is not limited to the United States: it also affects smaller advanced countries, such as Portugal. A growing number of international economic policymakers, including the Fund, believe the imbalances are too large and that "government intervention to reduce these deficits is desirable."

Blanchard, however, was reluctant to draw that conclusion without further research. If the deficits reflect "private saving and investment decisions" by firms and people exhibiting "rational expectations," how are policymakers to decide whether any interventions are justified? The call for public intervention should be based on a diagnosis of the distortions that lead to excessive current account deficits.

Blanchard discussed various sources of distortions-for example, in the export sector, the domestic labor market, or domestic credit markets. He also explained how these distortions might contribute to excessive current account deficits and noted the need for an appropriate policy response. In some cases, it might be optimal to mitigate the current account deficit through a fiscal restriction. But the presence of distortions does not necessarily require policies aimed at reducing the current account deficit. Blanchard concluded that more research is needed to identify what distortions, if any, might lead to excessive imbalances and what kind of policy response they require.

All together now

At the heart of the capital flows...