Current account imbalances are no more than the arithmetic difference between gross capital inflows and outflows. As these gross flows increase as a result of financial liberalisation, it is natural to expect the difference between them to become more volatile (Obstfeld (2010)). As Chart 4 shows, the growth of gross capital flows in the  2  BIS Review 174/2010  years preceding the crisis was dramatic. At the start of the 1980s, gross capital flows were around 5% of world GDP. By 2007, they had risen to 7 times that. This growth in capital flows and imbalances has been mirrored in the path of the external balance sheets of the major economies. These, too, have adjusted rapidly. In 1985, the US was a net external creditor. By 2009, it had become a net external debtor to the tune of around 20% of GDP. In 1999, China was a net external debtor. By 2008, it had become a net external creditor of around one third of GDP. An interesting perspective on the drivers of imbalances is provided by looking at the gross saving and investment behaviour of surplus and deficit countries over this period. Chart 5 looks at these patterns. It suggests a couple of striking patterns. First, the correlation between saving and investment rates appears to have weakened significantly over the past two decades, for both surplus and deficit countries. This is consistent with increasing capital mobility. Historically, there has been a high correlation between national saving and investment rates – the Feldstein-Horioka (1980) puzzle.
And monetary policy was well positioned to support the economic expansion and the achievement of the Fed’s goals of maximum employment and price stability. Risks to the Economy However, during the past month the outbreak and subsequent spread of the coronavirus has brought with it new risks to the economic outlook. This is first and foremost a human tragedy, and my deepest sympathies are with those who have lost loved ones. The virus and the necessary scale of the response to address the public health challenge will have near-term effects on the global economy. These repercussions have been especially strong in the hardest-hit countries, including China, South Korea, Japan, Italy, and Iran. We are now also hearing reports that some businesses here in the United States are being affected by supply disruptions and weakening demand. As people take precautions, we’re seeing concerns around the tourism and travel sectors, in particular. Disease outbreaks require a multifaceted approach, and the coronavirus is no different. This is primarily a public health issue, which will be fought on the front lines by doctors, nurses, and other healthcare professionals. Governments will also need to step in to support the healthcare response, and, if needed, to provide targeted relief to affected industries and workers through fiscal measures. Monetary Policy Central banks like the Federal Reserve also have an important role to play in addressing the economic effects of the coronavirus, ensuring that financial markets function effectively and providing support to the economy.