Determinants of current account imbalances in the global economy: A dynamic panel analysis

Das, Debasish Kumar (2012): Determinants of current account imbalances in the global economy: A dynamic panel analysis.

Abstract

This research presents an empirical investigation of the determinants of current account imbalance for the large sample of developed, emerging and developing countries during 1980-2011. Using dynamic panel GMM techniques, this study characterizes that current account balance are positively correlated with net foreign assets, trade openness and exchange rate stability and negatively associated with commodity price, real GDP growth and real effective exchange rate for the developed countries. While, among emerging countries, commodity price, real GDP growth, trade openness and de-jure capital openness is positively and net foreign asset, exchange rate stability index is negatively related with current account balance. These findings suggest that the current account determinants explain different characteristics in terms of different country groups. The results also hold Chinn and Ito (2007) and Chinn and Prasad (2003) along with three more important determinants with significant influence on current account, which have not ever considered in literature.

• Item Type: MPRA Paper
• Language: English
• Keywords: Current account Determinants, Global imbalance, Dynamic Panel GMM
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F40 - General; F - International Economics > F3 - International Finance > F30 - General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models

References

ABIAD, A., DETRAGIACHE, E. & TRESSEL, T. 2009. A new database of financial reforms. IMF Staff Papers, 57, 281-302.

AGUIAR, M. A. & AMADOR, M. 2011. Fiscal policy in debt constrained economies. National Bureau of Economic Research.

AIZENMAN, J. 2006. International reserves management and the current account. National Bureau of Economic Research.

AIZENMAN, J., CHINN, M. & ITO, H. 2012. The Trilemma Indices [Online]. Available: http://web.pdx.edu/~ito/trilemma_indexes.htm [Accessed 25/07/2012.

AIZENMAN, J., CHINN, M. D. & ITO, H. 2008. Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time. National Bureau of Economic Research.

AIZENMAN, J., CHINN, M. D. & ITO, H. 2010. The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration. Journal of International Money and Finance, 29, 615-641.

AKERLOF, G. A. & SHILLER, R. J. 2010. Animal spirits: How human psychology drives the economy, and why it matters for global capitalism, Princeton Univ Pr.

ALFARO, L., KALEMLI-OZCAN, S., VOLOSOVYCH, V. & RESEARCH, H. B. S. D. O. 2008. Why Doesn't Capital Flow from Rich to Poor Countries?: An Empirical Investigation. Review of Economics and Statistics 14, 597-605.

ARELLANO, M. & BOND, S. 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58, 277.

ARELLANO, M. & BOVER, O. 1995. Another look at the instrumental variable estimation of error-components models. Journal of econometrics, 68, 29-51. BALTAGI, B. H. 2008. Forecasting with panel data. Journal of Forecasting, 27, 153-173.

BERGIN, P. R. 2006. How well can the new open economy macroeconomics explain the exchange rate and current account? Journal of International Money and Finance, 25, 675-701.

BERNANKE, B. 2005. The global saving glut and the US current account deficit. Remarks at the Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia, 10.

BLANCHARD, O., GIAVAZZI, F. & SA, F. 2005. The US current account and the dollar. National Bureau of Economic Research.

BLUNDELL, R. & BOND, S. 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of econometrics, 87, 115-143.

BLUNDELL, R. & BOND, S. 2000. GMM estimation with persistent panel data: an application to production functions. Econometric Reviews, 19, 321-340.

BLUNDELL, R., GRIFFITH, R. & WINDMEIJER, F. 2002. Individual effects and dynamics in count data models. Journal of econometrics, 108, 113-131.

BOND, S. R., HOEFFLER, A., TEMPLE, J. & RESEARCH, C. F. E. P. 2001. GMM estimation of empirical growth models, Centre for Economic Policy Research.

BRACKE, T., BUSSIÈRE, M., FIDORA, M. & STRAUB, R. 2010. A Framework for Assessing Global Imbalances1. The World Economy, 33, 1140-1174.

BUERA, F. J. & SHIN, Y. 2009. Productivity growth and capital flows: The dynamics of reforms. National Bureau of Economic Research.

BUSSIÈRE, M., FRATZSCHER, M. & MÜLLER, G. 2004. Current account dynamics in OECD and EU acceding countries-an intertemporal approach.

CABALLERO, R. J., FARHI, E. & GOURINCHAS, P.-O. 2008. An Equilibrium Model of “Global Imbalances” and Low Interest Rates. American Economic Review, 98, 358-393.

CALDERON, C., CHONG, A. & LOAYZA, N. 2002. Determinants of current account deficits in developing countries. Contributions to Macroeconomics, 2, 2.

CALVO, G. A., LEIDERMAN, L. & REINHART, C. M. 1993. Capital inflows and real exchange rate appreciation in Latin America: the role of external factors. Staff Papers-International Monetary Fund, 108-151.

CARROLL, C. D. & JEANNE, O. 2009. A tractable model of precautionary reserves, net foreign assets, or sovereign wealth funds. National Bureau of Economic Research.

CHEUNG, C., FURCERI, D., RUSTICELLI, E., CO-OPERATION, O. F. E. & DEPT, D. E. 2010. Structural and cyclical factors behind current-account balances, OECD.

CHINN, M. & ITO, H. 2012. The Chinn-Ito Index – A de jure measure of financial openness

CHINN, M. D., EICHENGREEN, B. & ITO, H. 2011. A Forensic Analysis of Global Imbalances. National Bureau of Economic Research.

CHINN, M. D. & ITO, H. 2007. Current account balances, financial development and institutions: Assaying the world “saving glut”. Journal of International Money and Finance, 26, 546-569.

CHINN, M. D. & ITO, H. 2008. Global Current Account Imbalances: American Fiscal Policy versus East Asian Savings*. Review of International Economics, 16, 479-498.

CHINN, M. D. & PRASAD, E. S. 2003. M edium-term determinants of current accounts in industrial and developing countries: an empirical exploration. Journal of International Economics, 59, 47-76.

CLARIDA, R. 2005. Japan, China, and the US Current account deficit. Cato Journal, 25.

CLOWER, E. & ITO, H. 2011. The Persistence and Determinants of Current Account Balances: The Implications for Global Rebalancing.

CORBO, V. & HERNANDEZ, L. 1996. Macroeconomic adjustment to capital inflows: lessons from recent Latin American and East Asian experience. The World Bank Research Observer, 11, 61-85.

DARVAS, Z. 2012. Real effective exchange rates for 178 countries: A new database.

DE MELLO, L., PADOAN, P. C. & DEVELOPMENT. ORGANISATION FOR ECONOMIC CO-OPE, E. 2010. Are Global Imbalances Sustainable?, OECD.

DE MELLO, L., PADOAN, P. C. & ROUSOVÁ, L. 2011. The growth effect of current-account reversals.

DEBELLE, G. & FARUQEE, H. 1996. What determines the current account? A cross-sectional and panel approach. IMF Working Paper, 96/78.

DEBELLE, G. & GALATI, G. 2007. Current Account Adjustment and Capital Flows*. Review of International Economics, 15, 989-1013.

EDWARDS, S. 1996. Why are the Latin America's savings rate too low? An international comparative analysis. Journal of Development Economics, 51, 389-418.

EICHENGREEN, B. 2006. Global imbalances: The new economy, the dark matter, the savvy investor, and the standard analysis. Journal of Policy Modeling, 28, 645-652.

FERNANDEZ-ARIAS, E. & MONTIEL, P. J. 1996. The surge in capital inflows to developing countries: an analytical overview. The World Bank Economic Review, 10, 51-77.

FREUND, C. & WARNOCK, F. 2007. Current account deficits in industrial countries: the bigger they are, the harder they fall? : University of Chicago Press.

GLICK, R. & ROGOFF, K. 1995. Global versus country-specific productivity shocks and the current account. Journal of Monetary economics, 35, 159-192.

GOURINCHAS, P. O. & JEANNE, O. 2007. Capital flows to developing countries: The allocation puzzle. National Bureau of Economic Research.

GOURINCHAS, P. O. & REY, H. 2007. From world banker to world venture capitalist: US external adjustment and the exorbitant privilege. University of Chicago Press.

GRUBER, J. W. & KAMIN, S. B. 2007. Explaining the global pattern of current account imbalances. Journal of International Money and Finance, 26, 500-522.

HERRMANN, S. & JOCHEM, A. 2005. Determinants of current account developments in the central and east European EU member states-consequences for the enlargement of the euro area. Discussion Paper Series 1: Economic Studies.

HOLTZ-EAKIN, D., NEWEY, W. & ROSEN, H. S. 1988. Estimating vector autoregressions with panel data. Econometrica: Journal of the Econometric Society, 1371-1395.

IM, K. S., PESARAN, M. H. & SHIN, Y. 2003. Testing for unit roots in heterogeneous panels. Journal of econometrics, 115, 53-74.

ITO, H. & CHINN, M. 2007. East Asia and global imbalances: saving, investment, and financial development. National Bureau of Economic Research.

JOHNSON, S. & KWAK, J. 2010. 13 bankers: The Wall Street takeover and the next financial meltdown. Pantheon.

JU, J. & WEI, S. J. 2006. A solution to two paradoxes of international capital flows. National Bureau of Economic Research.

LAEVEN, L. & VALENCIA, F. 2012. The use of blanket guarantees in banking crises. Journal of International Money and Finance.

LANE, P. R. & MILESI-FERRETTI, G. M. 2008. International investment patterns. The Review of Economics and Statistics, 90, 538-549.

LEE, J. 2008. Exchange rate assessments: CGER methodologies, Intl Monetary Fund.

LEVIN, A., LIN, C. F. & JAMES CHU, C. S. 2002. Unit root tests in panel data: asymptotic and finite-sample properties. Journal of econometrics, 108, 1-24.

MARIA MILESI-FERRETTI, G. & RAZIN, A. 1998. Sharp reductions in current account deficits an empirical analysis. European Economic Review, 42, 897-908.

MENDOZA, E. G., QUADRINI, V. & RIOS-RULL, J. V. 2009. Financial integration, financial deepness and global imbalances. Journal of Political Economy 117, 371-416.

MILBOURNE, R. & OTTO, G. 1992. CONSUMPTION SMOOTHING AND THE CURRENT ACCOUNT*. Australian Economic Papers, 31, 369-384.

MILESI-FERRETT, G. M. & RAZIN, A. 1996. Sustainability of persistent current account deficits. National Bureau of Economic Research.

MILESI-FERRETTI, G. M. & RAZIN, A. 2000. Current Account Reversals and Currency Crises, Empirical Regularities. University of Chicago Press.

MILLER, M., SANTOS MONTEIRO, P. & ZHANG, L. 2011. Eastern Caution, Western Exuberance and Global Imbalances. Journal of Globalization and Development, 2, 1-40.

OBSTFELD, M. & ROGOFF, K. 1995. The mirage of fixed exchange rates. National Bureau of Economic Research.

OBSTFELD, M. & ROGOFF, K. 1996. Exchange rate dynamics redux. National Bureau of Economic Research.

OBSTFELD, M. & ROGOFF, K. 2010. Global imbalances and the financial crisis: products of common causes.

OBSTFELD, M. & ROGOFF, K. S. 1984. Exchange rate dynamics with sluggish prices under alternative price-adjustment rules. National Bureau of Economic Research Cambridge, Mass., USA.

OBSTFELD, M. & ROGOFF, K. S. 2005. Global current account imbalances and exchange rate adjustments. Brookings papers on economic activity, 2005, 67-123.

OTTO, G. & VOSS, G. M. 1995. Consumption, external assets and the real interest rate. Journal of Macroeconomics, 17, 471-494.

PRASAD, E. S., RAJAN, R. G. & SUBRAMANIAN, A. 2007. Foreign capital and economic growth. National Bureau of Economic Research. PWT. 2012. Penn World Table [Online]. Available: http://pwt.econ.upenn.edu/php_site/pwt_index.php [Accessed 25/07/2012.

RAYBAUDI, M., SOLA, M. & SPAGNOLO, F. 2004. Red signals: current account deficits and sustainability. Economics Letters, 84, 217-223.

REINHART, C. M. & ROGOFF, K. S. 2008. Is the 2007 US Sub-Prime Financial Crisis So Different? An International Historical Comparison. American Economic Review, 98, 339-344.

ROUBINI, N. & MIHM, S. 2010. Das Ende der Weltwirtschaft und ihre Zukunft, Bundeszentrale für politische Bildung.

SACHS, J. D. 1981. The Current Account in the Eacroeconomic Adjustment Process. National Bureau of Economic Research Cambridge, Mass., USA.

SHEFFRIN, S. M. & WOO, W. T. 1990. Testing an optimizing model of the current account via the consumption function. Journal of International Money and Finance, 9, 220-233.

STIGLITZ, J. E. 2010. Interpreting the Causes of the Great Recession of 2008. Financial System and Macroeconomic Resilience: Revisited. Bank for International Settlements.

TAYLOR, A. M. 2002. A century of current account dynamics. Journal of International Money and Finance, 21, 725-748.

TREHAN, B. & WALSH, C. E. 1991. Testing intertemporal budget constraints: theory and applications to US federal budget and current account deficits. Journal of Money, Credit and Banking, 23, 206-223.