August 22, 2013
"A Forensic Analysis of Global Imbalances"
We investigate whether the determinants of current account balances changed in the run-up to the 2009 financial crisis. Although changes in the budget balance appear to be an important factor for advanced current account deficit countries such as the USA, the effect of the ‘saving glut variables’, that is financial development and openness and legal development, has been relatively stable for emerging market countries, suggesting that those factors cannot explain the bulk of current account movements in recent years. We also find a structural break in current account behavior in 2006–8, in emerging market economies in particular, and attribute the anomalous behavior of precrisis current account balances to financial exuberance as opposed to the nature of the fiscal and monetary policy stance. Our projections suggest that absent drastic policy changes, the imbalances of the USA and China are unlikely to disappear.
Posted by Menzie Chinn at August 22, 2013 01:25 PMdigg this | reddit
Menzie: Thanks a lot for the reference to this interesting paper.
Posted by: Phil Rothman at August 22, 2013 08:42 PM
Not sure I saw a control in there for Official Foreign Reserves...
Posted by: Alexander Hamilton at September 3, 2013 07:50 PM