roger w ferguson, jr : global imbalances remarks by mr roger w ferguson, jr, vice - chairman of the board of governors of the us federal reserve system, at the european institute roundtable on financial and monetary affairs, washington, dc, 23 april 2004. * * * i am pleased to participate in a discussion with such distinguished colleagues and to share my thoughts about some key issues confronting economic policy makers. as you are all well aware, the global economy is becoming ever more tightly knit, with national economies increasingly drawn together through trade and financial market transactions - all facilitated by continuing advances in telecommunications and related technologies. the economic slowdown that the u. s. economy entered in 2001 was shared by europe, east asia, and latin america. similarly, the revival in growth that our economy has enjoyed since the middle of last year has also shown up, to greater and lesser degrees, in other parts of the world. although growth rates in different regions of the global economy are somewhat synchronous, such shared movements in output do not ensure that external deficits or surpluses will remain small. with the united states now running a current account deficit equal to about 5 percent of the gross domestic product, the rest of the world must run a correspondingly large net current account surplus. and when the u. s. deficit starts to decline, then trade flows abroad will adjust as well, reducing their overall surplus. because of its size and persistence, as well as recent declines in the value of the dollar, the u. s. current account balance is receiving an extraordinary amount of attention at present. observers routinely ask the following questions : is the deficit unusually, or even abnormally, large? how long can it be sustained? how might a correction of the deficit affect the united states and its trading partners, including europe? one must always be mindful of the possibility that the inevitable adjustment process related to global imbalances may be disorderly, but the tone of these questions is often more pessimistic than i think is warranted. nevertheless, these questions are important, and i will devote the remainder of my remarks to addressing them. is the u. s. current account deficit “ abnormal ”? the economics profession has no consensus model to tell us, for a given economy, what the appropriate level of the current account balance is. at best, economists can agree on some general principles. i will emphasize only two. first, current account imbalances allow countries to smooth consumption

market, an exchange traded currency futures, a market for government securities, an interest rate swap market, a securitization market, a primary market for corporate bank and money market instruments, and a repo market in government securities and corporate bonds. we are indeed trailing very far behind, aren ’ t we? but, by way of mitigation, i have to point out that the indian exchanges remain largely domestic given that capital controls still exist there. our banks deal very little in forward transactions and even less in options. we only have a thin spot market that does not offer adequate protection to our operators against the volatility of the dollar and the euro. if our system is still deficient, it is certainly not through want of trying. we have spared no effort to put in place the appropriate infrastructure to deepen the financial system. the enabling legislation has been put in place ; there are continuing efforts at the bank to develop a secondary market for government paper ; there are other initiatives by the stock exchange of mauritius ; and we have gbot, the exchange which is hosting this event this evening. in december 2009, the bank initiated foreign currency swaps tailor - made for the needs of our export operators when there was evidence that the volume of transactions on the domestic spot foreign exchange market had declined, and was causing some undue volatility in the market. this measure had a two - fold objective : first, to cater to the needs of the operators temporarily, and second, to encourage them to have greater recourse to hedging instruments for securing their rupee earnings. although we maintained the swaps throughout 2010, they have not been used since july of that year. participants still show reluctance to hedge their exposures – it is not easy to get rid of old habits. most of the time, our exporters have evolved in a fairly well - protected market ; they have developed a reliant client - base in europe, and they relied on the expected depreciation of the rupee to sustain their operations. there was no need for them to have recourse to hedging instruments to control their risks. well, as you all know, that era is over. today, there is not a single exporter in this room who does not believe that the economic viability of his enterprise depends on the proper management of its risks, or to put it differently, there is not a single exporter who believes he can ignore developments on the currency front and