The Origins of Persistent Current Account Imbalances in the Post-Bretton Woods Era
Comparative Political Studies, July 2019, DOI: 10.1177/0010414019859031
39 Pages Posted: 15 Nov 2014 Last revised: 18 Jul 2019
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 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 in export industries can be restrained to ensure competitiveness, leading to persistent trade surpluses. We estimate the contribution of these institutions to trade balances in Organisation for Economic Co-operation and Development (OECD) member countries since 1977 and find ample support for our hypothesis. Contrary to much of the literature, the choice of fixed or floating exchange rate regimes has only a small effect on trade or current account balances. In other words, internal adjustment in surplus countries via wage-bargaining institutions trumps external adjustment by deficit countries.
Keywords: current account, wage bargaining, competitiveness, exchange rates, euro crisis
JEL Classification: F41, F59
Suggested Citation: Suggested Citation