Global imbalances and capital account openness: an empirical analysis

Saadaoui, Jamel (2011): Global imbalances and capital account openness: an empirical analysis.

Abstract

We investigate if capital account openness has played a major role in the evolution of global imbalances on the period 1980-2003. We estimate, with panel regression techniques, the impact of capital account openness on medium run current account imbalances for industrialized and emerging countries by using a de jure measure of capital account openness (the Chinn-Ito index of capital account openness, 2002, 2006) and a de facto measure of capital account openness (the gross foreign assets measured as the sum of foreign assets and foreign liabilities). By increasing the opportunities of overseas investments, the relative capital account openness has had positive impact on medium run current account balances of industrialized countries (because of downward pressures on domestic investment rates). Conversely, the relative capital account openness has had negative impact on medium run current account balances of emerging countries (because of upward pressures on domestic investment rates). The evolutions of domestic and foreign capital account openness have allowed increasing medium run current account balances in absolute value during this period.

• Item Type: MPRA Paper
• Language: English
• Keywords: Global Imbalances; Capital Account Openness; Chinn-Ito index
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Arellano, M., Bover, O., 1995. Another Look at the Instrumental Variable Estimation of Error-Components Models, Journal of Econometrics, 68, pp. 29-51.

Baltagi, B.H., Demetriades, P.O., Law, S.H., 2009. Financial development and openness: Evidence from panel data, Journal of Development Economics, 89, pp. 285-296.

Bernanke, B., 2005. The Global Saving Glut and the U.S. Current Account. Remarks at the Sandridge Lecture, Virginia Association of Economics, Richmond, VA, March 10.

Carmignani, F., 2008. Does capital account liberalisation promote economic growth? Evidence from system estimation, Economics Bulletin, 6(49), pp. 1-13.

Chinn, M.D., 2010. Evidence on Financial Globalization and Crises: Global Imbalances, In: Encyclopedia of Financial Globalization (eds Caprio, G. et al.).

Chinn, M.D., Ito, H., 2002. Capital account liberalization, institutions and financial development: cross country evidence, Working Paper No. 8967, NBER.

Chinn, M.D., Ito, H., 2006. What matters for financial development? Capital controls, institutions, and interactions, Journal of Development Economics, 81, pp. 163-192.

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, pp. 546-569.

Chinn, M.D., Ito, H., 2008. Global Current Account Imbalances: American Fiscal Policy versus East Asian Savings, Review of International Economics, 16, pp. 479-498.

Chinn, M.D., Ito, H., 2008. A New Measure of Financial Openness, Journal of Comparative Policy Analysis, 10, pp. 309-322.

Chinn, M.D., Prasad, E.S., 2003. Medium term determinants of current accounts in industrial and develloping countries: an empirical exploration, Journal of International Economics, 59, pp. 47-76.

Clarida, R., 2005a. Japan, China, and the U.S. Current Account Deficit, CATO Journal 25, pp. 111-114.

Clarida, R., 2005b. Some Thoughts on ‘The Sustainability and Adjustment of Global Current Account Imbalances’. Speech given at the Council on Foreign Relations, March 28.

Cline, W. R., 2010. Renminbi Undervaluation, China's Surplus, and the US Trade Deficit, Policy Brief 10-20, Peterson Institute for International Economics.

Dooley, M., Folkerts-Landau, D., Garber, P., 2003. An Essay on the Revived Bretton Woods System, NBER Working Paper 9971, NBER.

Dooley, M., Folkerts-Landau, D., Garber, P., 2008. Direct Investment, Rising Real Wages, and the Absorption of Excess Labor in the Periphery, in R. Clarida (Eds.), G-7 Current Account Imbalances: Sustainability and Adjustment, University of Chicago Press for NBER.

Eichengreen, B., 2001. Capital Account Liberalization: What Do Cross-Country Studies Tell Us?, World Bank Economic Review, 15, pp. 341-365.

Faruqee, H., Isard, P. (Eds), 1998. Exchange rate assessment: Extensions to the macroeconomic balance approach, IMF Occasional Paper 167, International Monetary Fund.

Ito, H., Chinn, M.D., 2007. East Asia and Global Imbalances: Saving, Investment, and Financial Development, NBER Working Paper 13364, NBER.

Jeong, S.-E., Mazier, J., 2003. Exchange rate regimes and equilibrium exchange rates in East Asia, Revue économique, 54, pp. 1161-1182.

Jeong, S.-E., Mazier, J., Saadaoui, J., 2010. Exchange rate misalignments at world and European level: a FEER approach, Économie Internationale / International Economics, 121, pp. 25-58.

Kose, M.A., Prasad, E., Rogoff, K., Wei, S. J., 2006. Financial Globalization: A Reappraisal. NBER Working Paper No. 12484, NBER.

Lee, J., Milesi-Ferreti, G.M., Ostry, J.D., Prati, A., Ricci, L.A., 2008. Exchange rate assessments: CGER methodologies, IMF Occasional Papers 261, International Monetary Fund.

Quinn, D.P., Toyoda, A.M., 2008. Does Capital Account Liberalization Lead to Growth?, Review of Financial Studies, 21(3), pp. 1403-1449.

Servén, L., Nguyen, H., 2010. Global Imbalances Before and After the Global Crisis, Policy Research Working Paper 5354, The World Bank.

The Economist, ‘Finally, a talking-shop worth having’, November 4, 2010.