Reverse Causality in Global Current Accounts

36 Pages Posted: 10 Jun 2010

See all articles by Gunther Schnabl

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Stephan Freitag

University of Leipzig

Date Written: June 1, 2010

Abstract

The paper discusses global imbalances under the aspect of an asymmetric world monetary system. It identifies the US and Germany as center countries with rising/high current account deficits (US) and surpluses (Germany). These are matched by current account surpluses of countries stabilizing their exchange rates against the dollar (dollar periphery) and current account deficits of countries stabilizing their exchange rate against the euro (euro periphery). Meanwhile, the aggregate current account balance of the euro area has been by and large balanced. The paper finds that changes of world current account positions are affected by the macroeconomic policy decisions both in the centers and peripheries, albeit the centers – due to structural characteristics related to size – are argued to have a higher degree of freedom in macroeconomic policy making. In specific, expansionary monetary policy in the US as well as exchange rate stabilization and sterilization policies in the dollar periphery are found to have contributed to global current account imbalances. Given that the sample period for the analysis extends from 1981-2008, the results for Germany mostly capture the situation before the euro was created.

Keywords: Global Imbalances, Asymmetric World Monetary System, Twin Deficit, Twin Surplus, International Currency, Sterilization, Granger Causality Tests

JEL Classification: F31, F32

Suggested Citation

Schnabl, Gunther and Freitag, Stephan, Reverse Causality in Global Current Accounts (June 1, 2010). ECB Working Paper No. 1208. Available at SSRN: https://ssrn.com/abstract=1616650

Gunther Schnabl (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

Stephan Freitag

University of Leipzig ( email )

Marschnerstrasse 31
D-04109 Leipzig, 04109
Germany

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