Mercantilism in a Liberal World Order: The Origins of Persistent Current Account Imbalances

41 Pages Posted: 15 Nov 2014 Last revised: 11 Nov 2016

Mark S. Manger

University of Toronto - Munk School of Global Affairs

Thomas Sattler

University of Geneva - Department of Political Science and International Relations

Date Written: September 9, 2016

Abstract

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

Manger, Mark S. and Sattler, Thomas, Mercantilism in a Liberal World Order: The Origins of Persistent Current Account Imbalances (September 9, 2016). Available at SSRN: https://ssrn.com/abstract=2523954 or http://dx.doi.org/10.2139/ssrn.2523954

Mark S. Manger (Contact Author)

University of Toronto - Munk School of Global Affairs ( email )

Toronto, Ontario
Canada

Thomas Sattler

University of Geneva - Department of Political Science and International Relations ( email )

40 boulevard du Pont d'Arve
Genève 4, Geneve CH-1211
Switzerland

HOME PAGE: http://www.thomassattler.org

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