The most significant development in international finance in the last ten years was the emergence of large imbalances in current accounts and net foreign asset positions. As shown in the figure to the right, the evolution of these “global imbalances” since 1997 has been sharp and marked.
The U.S. current account deficit rose sharply in this period, reaching a record 6 percent of GDP in 2006 (see Figure 1a), while current account surpluses grew to record levels in Emerging Asia, oil exporting countries, and Japan. In line with these changes, the dispersion of NFA positions widened substantially (see Figure 1b). The NFA position of the United States declined markedly, while those of Japan, Emerging Asia, and the oil exporting countries rose. Recent economic turmoil in the United States has reduced the U.S. current account de.cit somewhat, but the nation’s large negative NFA position has changed little, and this “stock imbalance” is very likely to persist.
Large and persistent imbalances in the NFA positions of nations pose two central questionss: First, are these global imbalances sustainable, in the sense of being consistent with external solvency conditions (i.e., with the countries’ intertemporal budget constraints)? Second, are there differences in the sustainaibility of external positions across different country groupings depending on their characteristics (such as income levels or whether countries are net creditors or debtors)?