Global imbalances and global liquidity

The financial crisis has entered a dangerous phase. I argue in this paper that the retrenchment currently taking place in the European banking sector has broad implications for financial stability. More generally, I argue that the focus should be on ‘global liquidity imbalances’, rather than ‘global imbalances. ’ Global liquidity imbalances track the liquidity mismatch across countries and over time, which may or may not result in current account deficits and surpluses (i.e. global imbalances).