Explaining the Global Pattern of Current Account Imbalances

FRB International Finance Discussion Paper No. 846

46 Pages Posted: 26 Nov 2005

See all articles by Joseph W. Gruber

Joseph W. Gruber

Federal Reserve Board - Division of International Finance

Steven B. Kamin

Board of Governors of the Federal Reserve System

Date Written: November 2005

Abstract

This paper assesses some of the explanations that have been put forward for the global pattern of current account imbalances that has emerged in recent years: in particular, the large U.S. current account deficit and the large surpluses of the Asian developing economies. Based on the approach developed by Chinn and Prasad (2003), we use data for 61 countries during 1982-2003 to estimate panel regression models for the ratio of the current account balance to GDP. We find that a model that includes as its explanatory variables the standard determinants of current accounts proposed in the literature - per capita income, relative growth rates, the fiscal balance, demographic variables, and economic openness - can account for neither the large U.S. deficit nor large Asian surpluses of the 1997-2003 period. However, when we include a variable representing financial crises, which might be expected to restrain domestic demand and boost the current account balance, the model explains much of developing Asia's swing into surplus since 1997. Even so, the model cannot explain why the capital outflows associated with Asia's current account surpluses were channeled primarily into the U.S. economy. Observers have pointed to strong growth performance and a favorable institutional environment as elements attracting foreign investment into the United States, and we found strong evidence that good performance in these areas significantly reduces the current account balance. While a model incorporating these factors still fails to predict the large U.S. current account deficit (and, in fact, predicts a slight surplus), it does predict a U.S. current account balance that is relatively weaker than the aggregate balance of developing Asia.

Keywords: Capital flows, financial crisis, current account

JEL Classification: F21, F32

Suggested Citation

Gruber, Joseph W. and Kamin, Steven B., Explaining the Global Pattern of Current Account Imbalances (November 2005). FRB International Finance Discussion Paper No. 846. Available at SSRN: https://ssrn.com/abstract=854224 or http://dx.doi.org/10.2139/ssrn.854224

Joseph W. Gruber (Contact Author)

Federal Reserve Board - Division of International Finance ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Steven B. Kamin

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-3339 (Phone)
202-736-5638 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
291
rank
101,243
Abstract Views
2,095
PlumX Metrics