Revisiting the Glick-Rogoff Current Account Model: An Application to the Current Accounts of BRICS Countries

Zhai, Weiyang and Yoshida, Yushi (2020): Revisiting the Glick-Rogoff Current Account Model: An Application to the Current Accounts of BRICS Countries. Forthcoming in: Recent Econometric Techniques for Macroeconomics and Financial Data

Abstract

Understanding what drives the changes in current accounts is one of the most important macroeconomic issues for developing countries. Excessive surpluses in current accounts can trigger trade wars, and excessive deficits in current accounts can, on the other hand, induce currency crises. The Glick-Rogoff (1995, Journal of Monetary Economics) model, which emphasizes productivity shocks at home and in the world, fit well with developed economies in the 1970s and 1980s. However, the Glick-Rogoff model fits poorly when it is applied to fast-growing BRICS countries for the period including the global financial crisis. We conclude that different mechanisms of current accounts work for developed and developing countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: BRICS Countries; Current Accounts; Glick-Rogoff Model; Global Financial Crisis; Productivity Shock
• Subjects: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Andre, C., Balcilar, M., Chang, T., Gil-Alana, L.A., and Gupta, R., 2018. Current account sustainability in G7 and BRICS: Evidence from long-memory model with structural breaks. Journal of International Trade & Economic Development 27(6), 638-654.

Attanasio, O.P., Weber G., 2010. Consumption and Saving: Models of intertemporal allocation and their implications for public policy. Journal of Economic Literature 48, 693-751.

Behringer, J., van Treeck, T., 2018. Income distribution and the current account. Journal of International Economics 114, 238-254.

Belabed, C.A., Theobald, T., van Treeck, T., 2018. Income distribution and current account imbalances. Cambridge Journal of Economics 42, 47-94.

Bussière, M., Fratzscher, M., Müller, G.J., 2010. Productivity shocks, budget deficits and the current account. Journal of International Money and Finance 29, 1562-1579.

Catao, L.A.V., Milesi-Ferretti, G.M., 2014. External liabilities and crises. Journal of International Economics 94(1), 18-32.

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

Corsetti, G., Pesenti, P., Roubini, N., 1999. What caused the Asian currency and financial crisis? Japan and the World Economy 11(3), 305-373.

Cudre, S., Hoffmann, M., 2017. A provincial view of global imbalances: regional capital flows in China. Review of World Economics 153, 573-599.

Davis, J.S., Mack, A., Phoa, W., Vandenabeele, A., 2016. Credit booms, banking crises, and the current account. Journal of International Money and Finance. 60, 360-377.

Gervais, O., Schembri, L., Suchanek, L., 2016. Current account dynamics, real exchange rate adjustment, and the exchange rate regime in emerging-market economies. Journal of Development Economics 119, 86-99.

Glick, R., Rogoff, K., 1995. Global versus Country-specific productivity shocks and the current account. Journal of monetary Economics 35, 159-192.

Gregory, A.W., Head, A.C., 1999. Common and country-specific fluctuations in productivity, investment, and the current account. Journal of Monetary Economics 44, 423-451.

Harberger, Arnold C. 1950. Currency Depreciation, Income, and the Balance of Trade. Journal of Political Economy 58, no.1, 47-60.

Hoffmann, M., 2013. What drives China’s current account? Journal of International Money and Finance 32, 856-883.

İşcan, T.B., 2000. The terms of trade, productivity growth and the current account. Journal of Monetary Economics 45, 587-611.

Kaminsky, G.L., Reinhart, C.M., 1999. The twin crises: The causes of banking and balance-of-payments problems. American Economic Review 89(3), 473-500.

Laursen, S., Metzler, L.A., 1950. Flexible Exchange Rates and the Theory of Employment. Review of Economics and Statistics 32, 281-299.

Marquez, J., 2004. Productivity, investment, and current accounts: Reassessing the evidence. Review of World Economics 104, 282-301.

Obstfeld, M., 2012. Does the Current Account Still Matter? American Economic Review 102, 1-23.

Romelli, D., Terra, C., Vasconcelos, E., 2018. Current account and real exchange rate changes: The impact of trade openness. European Economic Review 105, 135-158.

Roy, S., Kemme, D.M., 2011. What is really common in the run-up to banking crises? Economics Letters, 113(3), 211-214.

Sevensson, L.E.O., Razin, A., 1983. The terms of trade and the current account: The Harberger-Laursen-Metzler Effect. Journal of Political Economy 91, 97-125.

Smit, B., Grobler, C., Nel, C., 2014. Sudden Stops and Current Account Reversals: Potential Macroeconomic Consequences for South Africa. South African Journal of Economics. 82(4) 616-627

Tan, Z.B., Yao, Y., Wei, S.J., 2015. Financial structure, corporate savings and current account imbalances. Journal of International Money and Finance 54, 142-167.

Yan, H.D., Yang, C.L., 2012. Are there different linkages of foreign capital inflows and the current account between industrial countries and emerging markets? Empirical Economics 43, 25-54.

Zorzi, M.C., Chudik, A., Dieppe, A., 2012. Thousands of models, one story: current account imbalances in the global economy. Journal of International Money and Finance. 31, 1319–1338.