Author: Karen H. Johnson
Council on Foreign Relations Press
Many analysts, including Chairman Ben Bernanke of the Federal Reserve, have argued that global imbalances are an important causal factor of the global financial crisis. But it is not the net external imbalances (or net financial flows) of the surplus countries that move across borders and must be intermediated by the global financial sector; it is the gross financial flows of all countries that require this. Moreover, it is the gross stocks of assets held cross-border that must be managed for risk. In this Center for Geoeconomic Studies Working Paper, Karen H. Johnson explains in detail the differences between net external imbalances and measured gross financial flows, revealing that data on net external imbalances do not identify which countries are most actively involved in large cross-border financial transactions and, hence, whose behavior is most critical for global financial stability.
Karen H. Johnson is a consulting economist with interests in international finance and monetary policy. Her previous position was as director of the Division of International Finance at the Federal Reserve Board of Governors.
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