Global imbalances and financial fragility

Abstract

The global financial crisis of 2008 has brought the role of global imbalances (net capital flows) front and center in the debate on the international economic outlook. The presence of large and sustained current account imbalances has led academics and policy makers to ponder over how big a threat they represent to the global economy. In this note, we argue that it is the gross rather than the net capital flows which are a better indicator of the fragility of the global financial system.