Imbalances and Policies

The term “imbalances” is often used to describe situations in which some economic units accumulate large volumes of liabilities. The economic units could be within domestic sectors (household, business, and government sectors)—in which case we refer to them as domestic imbalances—or different countries—in which case we refer to them as global imbalances. An example of domestic imbalance is the increase in household debt observed in the United States since the mid-1980s. An example of global imbalance is the increase in net foreign asset liabilities of the United States during the same period. These examples show that domestic and global imbalances are often interconnected: as domestic sectors accumulate liabilities, some of the liabilities are sold abroad. The article by Goodhart, Peiris, and Tsomocos in this issue deals with some aspects of global imbalances. The article by Koenig, also in this issue, deals with domestic imbalances. However, Koenig’s model can also be applied to studying global imbalances once we reinterpret agents of type 1 as residents of country 1 and agents of type 2 as residents of country 2. Therefore, to keep the discussion focused, I concentrate the commentary on global imbalances. This is an issue that has been at the center stage of the policy discussion