A Forensic Analysis of Global Imbalances

La Follette School of Public Affairs Working Paper No. 2011-007

55 Pages Posted: 31 Mar 2011

See all articles by Menzie David Chinn

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Hiro Ito

Portland State University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 26, 2011

Abstract

We re-examine the determinants of current account balances applying updated data to the framework based on Chinn and Ito (2007). The main purpose of this study is to examine whether the determinants of global current account balances changed during the period preceding the global crisis of 2008-09 while inquiring into the prospects for the global imbalances in the post-crisis period. Based on our estimates, changes in the budget balance appear to be an important factor affecting current account balances for advanced current account deficit countries such as the United States and the United Kingdom. The effect of the “saving glut variables” on current account balances has been relatively stable for emerging market countries, suggesting the prominence of those factors is not a particularly recent phenomenon. We also find the 2006-08 period to be the structural break for emerging market countries, and to a lesser extent, for industrialized countries. When we investigate what can explain the purportedly anomalous behavior in the current account balances during the 2006-08 period, we find that stock market performance and real housing appreciation explain the unusual current account balances in the pre-crisis period; fiscal procyclicality and monetary policy stance do not seem to matter as much. However, we also identify components of current account balances that can be only explained by country-specific factors. Extrapolating to the future, we find that for the U.S., fiscal consolidation alone cannot induce significant current account deficit reduction. For China, financial development may help shrink its current account surplus, but only when it is coupled with financial liberalization. These findings suggest that unless countries implement substantial policy changes, the global imbalances are unlikely to disappear.

Suggested Citation

Chinn, Menzie David and Eichengreen, Barry and Ito, Hiro, A Forensic Analysis of Global Imbalances (March 26, 2011). La Follette School of Public Affairs Working Paper No. 2011-007. Available at SSRN: https://ssrn.com/abstract=1798728 or http://dx.doi.org/10.2139/ssrn.1798728

Menzie David Chinn (Contact Author)

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Barry Eichengreen

University of California, Berkeley ( email )

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National Bureau of Economic Research (NBER)

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United States

Centre for Economic Policy Research (CEPR)

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Hiro Ito

Portland State University - Department of Economics ( email )

Portland, OR 97207-0751
United States
503-725-3930 (Phone)
503-725-3945 (Fax)

HOME PAGE: www.econ.pdx.edu

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