In as much as global imbalances – no matter whether they were caused by a “consumption binge” in advanced economies or a “savings glut” in EMEs – were the root cause of the crisis, reducing imbalances is a necessary condition for restoring global financial stability. The post-crisis debate on global imbalances has three interrelated facets.
The first is the role of exchange rates in global rebalancing. The second relates to capital flows into EMEs raising the familiar challenge of managing the impossible trinity. And the third facet is the framework for the adjustment process. Let me turn to these one by one. First, on the role of exchange rates – a prime lever for redressal of external imbalances.