In the post-crisis period, advanced economies as a group have been running a relatively small deficit on their current account of balance of payments. This aggregate deficit amounted to about $100 billion or about 0.2 percent of their GDP in 2011. However, both this deficit and the current account surplus for developing countries, which amounted to $470 billion (1.9 percent of GDP) in 2011, and mask massive differences among various regions.

In 2011 , among the developing countries, about 40 percent of the overall surplus in current accounts or $200 billion was accounted for by Asian countries while most other developing countries (with the exception of oil exporters with a surplus of $580 billion) had deficits that were financed by capital inflows and drawing down reserves. The level of international reserves held by emerging and developing economies rose to $6.8 trillion or 67 percent of the total global foreign exchange reserve stock of $10.2 trillion as of end-2011.<sup>47</sup> China alone accounted for about 40 percent of the massive stock of reserves held by emerging and developing economies. However, the changes in reserve holdings were far smaller than the volume of capital flows. For example, in 2007, just before the start of the global crisis, the increase in total holdings of foreign reserves amounted to $1.5 trillion compared to about $8 trillion in capital flows, which were mainly among the advanced countries or originated from them and thus were driven to a large extent by their macroeconomic policy stances.

Among advanced economies, the US continued to experience a current account deficit of about $470 billion, which in 2011 amounted to 3.1 percent of its GDP. Its expansionary fiscal and monetary policy stance has played an important role in both sustaining the global economic recovery and its large current account deficit. On the other hand, the Euro area, Japan and the rest of advanced countries all had significant surpluses in current account, amounting to about $370 billion in 2011. These very large current account deficits and surpluses are matched by massive net capital flows across borders, which are in turn supported by much larger gross flows, induced to a large extent by the loose monetary stance in the reserve currency countries. According to IMF , the size of the global capital markets (sum of stock market capitalization, bonds, and bank assets) reached $256 trillion in 2010, which was 4 times larger than world GDP.48 The persistence large deficits and surpluses carry substantial risks as they can cause disorderly adjustment which could lead to large exchange rate movements and cause substantial movements in capital as well as goods and services through their impact on prices. In addition, massive trade imbalances can lead to protectionist policies in deficit countries. According to OECD, about 60 percent of 268 episodes of large foreign capital inflows ended in “sudden stops,” and about one in ten episodes ended in either a banking or currency crisis.<sup>49</sup> This experience provides additional evidence in support of the hypothesis that the major weaknesses in the current international monetary system are harmful to all countries, including developing countries. These problems could become exacerbated in a multiple reserve currency system in the future--particularly if the reserve currency countries fail to closely coordinate their macroeconomic policies (see the following section).

Globalization and the expansion of the global economy have resulted in a sharp increase in the volume of international transactions. However, these trends, as well as the persistence of large balance of payments imbalances, have brought to light the limitations of the current international monetary system and national policies that were designed for a far less financially integrated world. As we argue below, a well designed international monetary system must have two key functions: (i) it should allow countries to run temporary surpluses and deficits on current account and accumulate net claims, which is a rather mechanical role and has been accomplished by the current system; and (ii) it should have a mechanism-

> 47  IMF, “Currency Composition of Official Foreign Exchange Reserves.”

> 48 IMF, Global Financial Stability Report, April, 2012.

> 49 OECD Economic Outlook, OECD, Paris, 2011.

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