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On Current Account Surpluses and the Correction of Global Imbalances

59 Pages Posted: 17 Feb 2007  

Sebastian Edwards

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area; National Bureau of Economic Research (NBER)

Date Written: February 2007

Abstract

In this paper I analyze the nature of external adjustments in current account surplus countries. I ask whether a realignment of world growth rates -- with Japan and Europe growing faster, and the U.S. growing more slowly -- is likely to solve the current situation of global imbalances. The main findings may be summarized as follows: (a) There is an important asymmetry between current account deficits and surpluses. (b) Large surpluses exhibit little persistence through time. (c) Large and abrupt reductions in surpluses are a rare phenomenon. (d) A decline in GDP growth, relative to long term trend, of 1 percentage point results in an improvement in the current account balance -- higher surplus or lower deficit -- of one quarter of a percentage point of GDP. Taken together, these results indicate that a realignment of global growth -- with Japan and the Euro Zone growing faster, and the U.S. moderating its growth -- would only make a modest contribution towards the resolution of global imbalances. This means that, even if there is a realignment of global growth, the world is likely to need significant exchange rate movements. This analysis also suggests that a reduction in China's (very) large surplus will be needed if global imbalances are to be resolved.

Suggested Citation

Edwards, Sebastian, On Current Account Surpluses and the Correction of Global Imbalances (February 2007). NBER Working Paper No. w12904. Available at SSRN: https://ssrn.com/abstract=963737

Sebastian Edwards (Contact Author)

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area ( email )

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National Bureau of Economic Research (NBER)

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