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Journal of Asian Economics

Document Type

Conference Proceeding

Publication Date



Budget deficits -- Mathematical models, Balance of trade -- Mathematical models, Saving and investment -- China, Saving and investment -- Japan, Capital movements


This paper examines two U.S. current account deficit episodes, one in the 1980s and the other in the current 2000s, in which Japan and China, respectively, are the current account surplus countries that are criticized for contributing to the deficits. In both periods, U.S. policy makers pointed out the underdeveloped and closed financial markets of the current account surplus countries and advocated for these countries to fix the deficiencies, a position akin to the current “saving glut” argument. In both episodes, the current account surplus countries have criticized the United States for its low saving, especially public saving (the “Twin Deficit” argument). This paper presents empirical findings that are consistent with the Twin Deficit hypothesis; A one percentage point increase in the budget balance raises the current account balance by 0.10-0.49 percentage point for industrialized countries. The saving glut argument seems to be applicable only for countries with highly-developed legal systems and open financial markets. While the United States has been experiencing a savings drought in both episodes, the Japanese current account surplus was driven by underinvestment in the 1980s and by over-saving during the 2000s. Furthermore, although the current Chinese current account surplus is driven by its oversaving, there is no evidence of excess domestic saving in the Asian emerging market countries; rather, they seem to have suffered from depressed investment in the wake of the 1997 financial crises.


This paper is prepared for the conference “Asian Economic Integration in a Global Context,” organized by the American Committee for Asian Economic Studies (ACAES) and the Rimini Centre for Economic Analysis (RCEA) and held in Rimini, Italy on August 29-31, 2008.

This is the authors' version of a paper that was subsequently published in the Journal of Asian Economics, volume 20, issue 3, Pages 294–313. Available at



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