BIS’s Borio says current account obsession obscures important results

The G-20's traditional focus on current account imbalances hides important information on global financial flows, Bank for International Settlements' (BIS) Claudio Borio, said on August 28.

Borio, who heads the BIS's Monetary and Economic Department, warned that while the current account is important, its centrality in debates over global spillovers is counterproductive. "It may even lead to the wrong policy prescriptions," he told a conference hosted by the European Central Bank and Central Bank of the Republic of Turkey.

He noted a few counterintuitive results that emerge when one studies gross rather than net flows. For example the "Lucas paradox", that capital flows sub-optimally "uphill" from emerging markets with current account surpluses to developed countries with deficits, appears false. Foreign direct investment and bank flows tend to flow in the opposite direction to what theory suggests.

There need be no link between saving and finance within an economy, and no need for bilateral balance between economies, he said. Instead deficit and surplus countries could be financed entirely by a third country that is a "pure financial hub".

Failure to recognise these nuances has led policy-makers to take disastrous decisions in the past, Borio warned. "There is a need to rebalance this situation, as regards both analytics and policy," he said.