Global imbalances played an important role in setting the stage for the financial crisis by depressing real interest rates and supporting the search for yield. Central banks did not trigger this phenomenon but accommodated it. Monetary policy is not well suited to deal with current account imbalances and the resulting capital flows and asset price developments. Greater importance should therefore be attached to fiscal policy. While international cooperation is desirable, it is unlikely to achieve much whenever there is a conflict with important domestic policy issues. Nevertheless, the agreements reached at the G-20 Pittsburgh summit provides hope that cooperation will be improved.
White Paper No. 4, 2010