Winners and losers from reducing global imbalances

We highlight the welfare effect of policies that balance global current accounts in the face of uninsurable income risk and borrowing constraints. Subsidizing savings in debtor economies reduces imbalances and raises the welfare of almost all citizens by increasing world-wide capital, raising wages, and improving insurance for low-wealth households. However, the same balancing of current accounts is achieved by taxing savings in lender economies, but hurts most households by reducing capital. We conclude that balancing global imbalances should not be a goal unto itself, but may be a by-product of raising investment rates, especially in debtor countries.