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Global current account imbalances have been at the forefront of policy debates over the past few years. Many observers have recently singled them out as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have helped fuel the credit booms and risk-taking in the major advanced deficit countries at the core of the crisis, by putting significant downward pressure on world interest rates and/or by simply financing the booms in those countries. The authors argue that this perspective on global imbalances bears reconsideration. They highlight two conceptual problems: drawing inferences about a country's cross-border financing activity based on observations of net capital flows; and explaining market interest rates through the saving-investment framework.
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