Explaining the Global Pattern of Current Account Imbalances

By Joseph W. Gruber, Steven B. Kamin. 2005

411 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/72f37050e60c7c72de8b824d6e55ef5bcce57eaf

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Citations in the corpus

Current account determinants and external sustainability in periods of structural change (2011, neutral): “On the other hand, a number of papers have examined the long-run relationship between the current account and its fundamental macroeconomic determinants by applying standard econometric techniques (e.g. see Debelle and Faruqee 1996; Blanchard and Giavazzi 2002; Chinn and Prasad 2003; Bussière et al.”
Twin deficits: squaring theory, evidence and common sense (2006, positive): “Bussière et al. (2005), Gruber and Kamin (2005) and Chinn and Ito (2005) find that only some 1 to 20 percent of the increase in the public deficit is reflected in the trade deficit, whereas the effect is statistically significant only according to the last study.”
The External Balance Assessment (EBA) Methodology (2013, background): “…the work on the CGER predecessor to EBA (Lee et al. (2008)), and for example, Blanchard (2007), Chinn and Prasad (2003), Chinn, Eichengreen, and Ito (2007, 2011), Debelle and Faruqee (1996), de Santis, Finicelli, and Veronese (2011), Gruber and Kamin (2007, 2008), and Bussiere et al. (2010).”
'Fiscal Devaluation' and Fiscal Consolidation: The VAT in Troubled Times (2012, background): “The second is that the impact on net exports of a shift between revenue sources that leaves total revenue unchanged can be seen easily by 18 See for example Chin and Prasad (2003), Gruber and Kamin (2007), and Lee et al. (2008).”
A Framework for Assessing Global Imbalances (2008, neutral): “Chinn and Prasad (2003) and Gruber and Kamin (2005) fi nd, however, a very low elasticity of the trade balance to a fi scal defi cit.”
Global Current Account Imbalances: American Fiscal Policy versus East Asian Savings (2008, neutral): “3 Roughly contemporaneously with us, Gruber and Kamin (2005) have written a paper closely related to ours.”
A Forensic Analysis of Global Imbalances (2011, background): “5 Smaller estimates of the fiscal impact are reported by Bussiere (2005), Corsetti and Muller (2006), and Gruber and Kamin (2007).”
Asset Prices, Exchange Rates and the Current Account (2007, background): “…gross international asset positions (Lane and Milesi-Ferretti, 2005; Gourinchas and Rey, 2007), while others underline the role of precautionary motives due to uncertainty and demographics as a rationale for the high saving rates in several EMEs (e.g. Gruber and Kamin, 2007; Chinn and Ito, 2007).”
Global imbalances and the financial crisis: products of common causes (2009, neutral): “…step in understanding the increasingly destabilizing forces driving global imbalances starting around 2004 is to return to the period following the Asian crisis—though as we shall see, the effects of the Asian crisis itself are only part of the story, and perhaps not even the most important part .”
International Finance and Income Convergence: Europe is Different (2007, methodology): “A. Empirical Approach We begin with a reduced form specification similar to that proposed by Chinn and Prasad (2003) and widely used with small variations by, among others, Chinn and Ito (2005), and Gruber and Kamin (2005).”
Income Inequality and Current Account Imbalances (2012, background): “Furthermore, in our paper these claims are generated by a combination of a deterioration in income inequality and easier access to credit in domesticfinancial markets, rather than by a superior financial infrastructure and access to that infrastructure by foreign investors.”