Capital flows and the current account: Taking financing (more) seriously

This paper questions the appropriateness of popular analytical frameworks that focus on current accounts or net capital flows as a basis for assessing the pattern of cross-border capital flows, the degree of financial integration and the vulnerability of countries to financial crises. In the process, it revisits the Lucas paradox, the Feldstein-Horioka puzzle and the notion of sudden stops. It argues that, in a world of huge and free capital flows, the centrality of current accounts in international finance, and hence in academic and policy debates, should be reconsidered.

JEL classification: E10, E40, E44, E47, E52, E60

Keywords: capital flows, current account, global imbalances, financial integration, credit, finance, money

The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.