A Forensic Analysis of Global Imbalances

64 Pages Posted: 15 Oct 2011 Last revised: 1 Dec 2013

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: October 2011

Abstract

We examine whether the behavior of current account balances changed in the years preceding the global crisis of 2008-09, and assess the prospects for global imbalances in the post-crisis period. Changes in the budget balance are an important factor affecting current account balances for deficit countries such as the U.S. and the U.K. The effect of the "saving glut variables" on current account balances has been relatively stable for emerging market countries, suggesting that those factors cannot explain the bulk of their recent current account movements. We also find the 2006-08 period to constitute a structural break for emerging market countries, and to a lesser extent, for industrialized countries. We attribute the anomalous behavior of pre-crisis current account balances to stock market performance and real housing appreciation; fiscal procyclicality and the stance of monetary policy do not matter as much. Household leverage also appears to explain some of the standard model's prediction errors. Looking forward, U.S., fiscal consolidation alone cannot induce significant deficit reduction. For China, financial development might help shrink its current account surplus, but only when it is coupled with financial liberalization. These findings suggest that unless countries implement substantially more policy change, global imbalances are unlikely to disappear.

Suggested Citation

Chinn, Menzie David and Eichengreen, Barry and Ito, Hiro, A Forensic Analysis of Global Imbalances (October 2011). NBER Working Paper No. w17513. Available at SSRN: https://ssrn.com/abstract=1944421

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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Berkeley, CA 94720
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

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United Kingdom

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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