Causes of Global Imbalances: A Global VAR Analysis

48 Pages Posted: 19 Feb 2013

See all articles by Zhichao Zhang

Zhichao Zhang

Durham University - Durham Business School

Frankie Chau

Durham University Business School

Nan Shi

Durham University - Durham Business School

Date Written: February 17, 2013

Abstract

We develop a Global VAR (GVAR) model for current account analysis. The model includes major economies involved in global imbalances and a few key macro variables to comprehensively examine the relations between these economies and the causality of the variables. We estimate the GVAR model based on current account data. Our approach improves panel regression on the causes by detecting both long-run relationship and short-run dynamics. We further apply the model to illustrate the evolution of the current account balance under different sources of shocks. Contemporaneous effects and variance decomposition are used to complement our findings from the impulse responses to the shocks. We find strong support for the low interest rate of the US as the main driving force of the current account imbalances. In particular, long-term interest rate decrease provides consistent mimic of the surpluses in China and Japan, and the deficit of the US. Undervaluation of yen is also evident, but the dynamics of the current account under renminbi depreciation do not consistently capture the stylized facts observed. The effects of real GDP growths and oil price on the imbalances are also mixed and thus not conclusive. Our variance decomposition confirms our findings by detecting substantial contribution of both US interest rates and yen/dollar exchange rate.

Keywords: global imbalances, GVAR

JEL Classification: F32

Suggested Citation

Zhang, Zhichao and Chau, Frankie and Shi, Nan, Causes of Global Imbalances: A Global VAR Analysis (February 17, 2013). Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2220549 or http://dx.doi.org/10.2139/ssrn.2220549

Zhichao Zhang

Durham University - Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Frankie Chau

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Nan Shi (Contact Author)

Durham University - Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
113
Abstract Views
676
rank
248,768
PlumX Metrics