Document Type
Working Paper
Publication Date
10-2011
Subjects
Balance of payments, Financial globalization, Capital markets, Financial integration, Economic stability
Abstract
We examine whether the behavior of current account balances changed in the years preceding the global crisis of 2008-09, and assess the prospects for global imbalances in the post-crisis period. Changes in the budget balance are an important factor affecting current account balances for deficit countries such as the U.S. and the U.K. The effect of the “saving glut variables” on current account balances has been relatively stable for emerging market countries, suggesting that those factors cannot explain the bulk of their recent current account movements. We also find the 2006-08 period to constitute a structural break for emerging market countries, and to a lesser extent, for industrialized countries. We attribute the anomalous behavior of pre-crisis current account balances to stock market performance and real housing appreciation; fiscal procyclicality and the stance of monetary policy do not matter as much. Household leverage also appears to explain some of the standard model’s prediction errors. Looking forward, U.S., fiscal consolidation alone cannot induce significant deficit reduction. For China, financial development might help shrink its current account surplus, but only when it is coupled with financial liberalization. These findings suggest that unless countries implement substantially more policy change, global imbalances are unlikely to disappear.
Persistent Identifier
http://archives.pdx.edu/ds/psu/20335
Citation Details
Chinn, Menzie David; Eichengreen, Barry; and Ito, Hiro, "A Forensic Analysis of Global Imbalances" (2011). Economics Faculty Publications and Presentations. 58.
http://archives.pdx.edu/ds/psu/20335
Description
© 2011 by Menzie D. Chinn, Barry Eichengreen, and Hiro Ito. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
NBER Working Paper Series, #17513.