A Forensic Analysis of Global Imbalances

Menzie Chinn, Barry Eichengreen and Hiro Ito

No 17513, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-cba, nep-cis, nep-ifn and nep-opm
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

Published as "A Forensic Analysis of Global Imbalances," Oxford Economic Papers (2013), (March 2013 version) (with Barry Eichengreen and Hiro Ito).

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Journal Article: A forensic analysis of global imbalances (2014)
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