Structural and Cyclical Factors behind Current Account Balances

Abstract

Global external imbalances widened persistently over the last several years and have narrowed abruptly over the course of the financial crisis. Understanding the extent to which structural or cyclical factors may have driven these patterns is important to assess the likely evolution of global imbalances going forward, as well as the potential adjustment that can be achieved through changes in policy. This paper assesses the link between structural and cyclical factors and current account balances using a panel of 94 countries from 1973 to 2008. We find that the medium-term evolution of global external imbalances can be related in large part to structural factors including cross-country differences in demographics, fiscal deficits, oil dependency and intensity, stage of economic development, financial market development, and institutional quality. Part of the narrowing in current account balances since the financial crisis appears to be related to various cyclical factors including changes in output growth, oil prices, and exchange rates, and may be expected to reverse alongside the economic recovery.

Current accounts and oil price fluctuations in oil-exporting countries: The role of financial development

“…This effect on spending might also be magnified if a deeper financial system reduces the need for precautionary savings by removing borrowing constraints. In line with those expectations, our results evidence a negative financial deepening effect on the current account for our panel of oil-exporting countries; a conclusion which is consistent with the findings of Kennedy and Slok (2005), Gruber and Kamin (2007), Cheung et al (2010) and Arezki and Hasanov (2013).…”

“…The recent empirical literature evidences that countries with more important oil-producing sectors tend to have higher current-account balances, as higher oil revenues tend to boost saving more than investment (Cheung et al, 2010). This result is corroborated by recent trends: spending of oil producers have increased by less than oil revenues, which has resulted in an improvement of their current accounts, an overall trend confirmed by several studies (Higgins et al, 2006;IMF, 2006a;Cheung et al, 2010;Arezki and Hasanov, 2013).…”

“…This result is corroborated by recent trends: spending of oil producers have increased by less than oil revenues, which has resulted in an improvement of their current accounts, an overall trend confirmed by several studies (Higgins et al, 2006;IMF, 2006a;Cheung et al, 2010;Arezki and Hasanov, 2013).…”

“…In our case, we find that the coefficient associated with the ratio of domestic GDP per capita to US GDP per capita is not significant. This result, also obtained by Chinn and Prasad (2003) for developing countries and Cheung et al (2010) for a wide sample of economies, can be explained by the fact that while some countries are indeed at early stages of development with a corresponding negative impact on the current account, others have clearly reached high levels of development with a corresponding positive effect on the current account position. Negative and positive effects may thus be compensated, explaining the non-significant coefficient.…”

“…As it is standard in the literature (see Chinn and Prasad, 2003;Ju and Wei, 2006;Prasad et al, 2007;Cheung et al, 2010; and references in Section 2), the variable GDP per capita, adjusted by PPP exchange rates, relative to the US aims at capturing the stage of economic development of countries relative to the US. The underlying idea is the following: when countries are at the beginning of their development process, they run current account deficits due to important capital imports.…”