Mercantilism in a Liberal World Order: The Origins of Persistent Current Account Imbalances
45 Pages Posted: 15 Nov 2014 Last revised: 29 Jul 2017
Date Written: July 26, 2017
Why do some countries run persistent current account surpluses? Why do others run deficits, often over decades, leading to enduring global financial imbalances? Such persistent imbalances are the root cause of many financial crises and a major source of international economic conflict. We propose that differences in wage-bargaining institutions explain a large share of imbalances through their effect on the trade balance. In countries with coordinated wage bargaining, wage growth can be restrained to ensure competitiveness, leading to long-term trade surpluses. We estimate the contribution of these institutions to trade balances in OECD member countries since 1977 and find ample support for our hypothesis. Although the introduction of the euro has clearly exacerbated the problem, no substantial difference otherwise exists between fixed and floating exchange rates. In other words, internal adjustment in surplus countries trumps external adjustment by deficit countries.
Keywords: current account, wage bargaining, competitiveness, exchange rates, euro crisis
JEL Classification: F41, F59
Suggested Citation: Suggested Citation