Explaining the global pattern of current account imbalances

Abstract

This paper assesses some of the explanations that have been put forward for the global pattern of current account imbalances that has emerged in recent years: in particular, the large U.S. current account deficit and the large surpluses of the Asian developing economies. Based on the approach developed by Chinn and Prasad (2003), we use data for 61 countries during 1982-2003 to estimate panel regression models for the ratio of the current account balance to GDP. We find that a model that includes as its explanatory variables the standard determinants of current accounts proposed in the literature-per capita income, relative growth rates, the fiscal balance, demographic variables, and economic openness-can account for neither the large U.S. deficit nor large Asian surpluses of the 1997-2003 period. However, when we include a variable representing financial crises, which might be expected to restrain domestic demand and boost the current account balance, the model explains much of developing Asia's swing into surplus since 1997. Even so, the model cannot explain why the capital outflows associated with Asia's current account surpluses were channeled primarily into the U.S. economy. Observers have pointed to strong growth performance and a favorable institutional environment as elements attracting foreign investment into the United States, and we found strong evidence that good performance in these areas significantly reduces the current account balance. While a model incorporating these factors still fails to predict the large U.S. current account deficit (and, in fact, predicts a slight surplus), it does predict a U.S. current account balance that is relatively weaker than the aggregate balance of developing Asia.

Estimating the effect of the EMU on current account balances: A synthetic control approach

“…The current account balance predictors in the analysis are a set of macroeconomic variables that are known to influence the current account balance. They have been selected based on the literature on current account balances and the EMU set out in Section 2 and the previous empirical literature on the economic determinants of current account balances (see for example Chinn and Prasad, 2003;Gruber and Kamin, 2007;Schmitz and von Hagen, 2011). I account for the competitiveness channel by including measures of the price level of exports (relative to the US) and trade openness (%).…”

Testing the Validity of the Triplet Deficit Hypothesis for Turkey: Asymmetric Causality Analysis

“…For example, the studies of Hatsopoulos et al (1988), Fischer and Easterly (1990), Hakkio (1995), Milesi-Ferretti and Razin (1996), Higgins andKlitgaard (1998), Cooper (2001), Mann (2002), Gale and Orszag (2003), Labonte (2005), Hubbard (2006), Szakolczai (2006), Elwell (2007Elwell ( , 2010 and Feldstein (2008) can be adduced for the theoretical studies about triplet deficit. Some empirical studies on this topic have argued that the triple deficit hypothesis is valid (Zaidi, 1985;Roubini, 1988;Baxter and Crucini, 1993;Eisner, 1994;Freund, 2005;Kuijs, 2006;Gruber and Kamin, 2007). For example, Penati and Dooley (1984), in their study of 19 industrialized countries, demonstrated the validity of the triple deficit hypothesis which emphasizes that imbalances emerge in the current account because of changes in the volume of savings.…”

“…Kuijs (2006) analyzed data for the period 1980-2005 and found that the triple deficit hypothesis applied in reverse to the Chinese economy and called this a case of 'triple surpluses'. In their study of 61 countries for the period 1982-2003, Gruber and Kamin (2007) stated that globally increasing savings negatively affected economies that experienced a savings gap and thus caused an increase in the current accounts deficit.…”

“…However, the findings of several other studies support the REH (Dewald and Ulan, 1990;Kim, 1995;Kaufmann et al 2002;Kim and Roubini, 2008;Ratha, 2012). Yet, some studies have also cast doubts on the validity of both traditional and REH approaches and have argued that the savings-investment gap is effective in the emergence of a current account deficit (Milesi-Ferretti and Razin, 1996;Higgins and Klitgaard, 1998;Cooper, 2001;Gale and Orszag, 2003;Freund, 2005;Hubbard, 2006;Kuijs, 2006;Gruber and Kamin, 2007). Although there was a budget surplus in some developed countries, growing current account deficits cast doubts on the validity of the twin deficit hypothesis.…”

Financial reforms and capital flows to emerging Europe

“…More specifically, we analyse if countries with more developed financial systems attract net capital inflows. 1 While the standard (medium-term) determinants of international capital flow patterns have been prominently established by Chinn and Prasad (2003) and Gruber and Kamin (2007), there is no consensus yet on the role of domestic financial systems for international capital flows.…”