Explaining the Global Pattern of Cu

Explaining the Global Pattern of Current Account Imbalances
Joseph W. Gruber and Steven B. Kamin1
NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References to International Finance Discussion Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors. Recent IFDPs are available on the Web at http://www.federalreserve.gov/pubs/ifdp/. This paper can be downloaded without charge from the Social Science Research Network electronic library at http://www.ssrn.com/.
Abstract:

This paper assesses some of the explanations that have been put forward for the global pattern of current account imbalances that has emerged in recent years: in particular, the large U.S. current account deficit and the large surpluses of the Asian developing economies. Based on the approach developed by Chinn and Prasad (2003), we use data for 61 countries during 1982-2003 to estimate panel regression models for the ratio of the current account balance to GDP. We find that a model that includes as its explanatory variables the standard determinants of current accounts proposed in the literature-per capita income, relative growth rates, the fiscal balance, demographic variables, and economic openness-can account for neither the large U.S. deficit nor large Asian surpluses of the 1997-2003 period. However, when we include a variable representing financial crises, which might be expected to restrain domestic demand and boost the current account balance, the model explains much of developing Asia's swing into surplus since 1997. Even so, the model cannot explain why the capital outflows associated with Asia's current account surpluses were channeled primarily into the U.S. economy. Observers have pointed to strong growth performance and a favorable institutional environment as elements attracting foreign investment into the United States, and we found strong evidence that good performance in these areas significantly reduces the current account balance. While a model incorporating these factors still fails to predict the large U.S. current account deficit (and, in fact, predicts a slight surplus), it does predict a U.S. current account balance that is relatively weaker than the aggregate balance of developing Asia.

Keywords: Current account, financial crisis, capital flows

JEL classification: F21, F32

I. Introduction
The pattern of global current account imbalances has received considerable attention in recent years. Most prominently, the U.S. current account deficit has widened from $125 billion in 1995 to $668 billion in 2004 (shown in Figure 1), or from 1.5 percent of GDP to 5.7 percent of GDP. This deficit is mirrored in some equally marked surpluses on the part of some of the United States' trading partners. The current account balances of major developing East Asian economies (China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand) have moved from an aggregate deficit of $27 billion in 1995 to a surplus of $186 billion in 2004, or from negative 1.2 percent of GDP to positive 5.3 percent of GDP. More generally, the aggregate current account balance of the developing countries moved into surplus starting in 2000.

The present pattern of external imbalances appears inconsistent with the standard view that mature industrial economies should be exporting capital to poor developing countries. Because developing countries have higher labor/capital ratios, they should in principle have higher marginal productivities of capital and thus attract capital from labor-poor industrial economies. Moreover, if developing countries can expect faster income growth as they catch up to industrial countries, this provides an incentive for them to borrow against their higher future income, also leading to current account deficits.

There is no consensus explanation for the current pattern of international capital flows, and many hypotheses have been put forward: U.S. fiscal deficits; declines in U.S. private saving; the surge in U.S. productivity growth; increases in global financial intermediation; a global savings glut; a rash of emerging market financial crises; and exchange rate pegs by our trading partners. However, many of these factors are quite amorphous, and it has been difficult to muster support for one explanation against another.

By the same token, it has been even more difficult to assess all of the proposed factors jointly and compare their separate contributions to the international pattern of current account imbalances. Ferguson (2005) reports one of the few attempts to conduct such as exercise. The Federal Reserve staff's open economy macroeconomic simulation model is used to gauge the contribution of different shocks to the evolution of the U.S. trade deficit. The widening of the deficit is attributed primarily to the rise in U.S. productivity growth, a fall in the risk premium on dollar assets, and the weakening of foreign domestic demand; other factors, including the U.S. fiscal deficit and decline in private saving, receive less weight in the decomposition analysis. This exercise is undeniably useful in enhancing our understanding of the roots of the U.S. trade deficit. Nevertheless, the simulation model is unlikely to precisely capture the economic linkages involved in the determination of the external balance, and identifying the quantitative magnitude of the shocks affecting the trade deficit is both difficult and subjective.

In this paper, we adopt a more empirical but less structured approach to explaining the recent emergence of large current account imbalances. Our approach jumps off from the influential research of Chinn and Prasad (2003).2 Chinn and Prasad developed a large multi-country database for the period 1971-1995 and estimated a battery of cross-sectional and panel regressions relating current account/GDP ratios to a wide range of potential determinants, including, among others, the fiscal deficit, net foreign asset position, per capita income, output growth, demographic variables, terms of trade volatility, and openness to trade. Based on a similar approach, but with altered specifications and data extending through 2003, we estimate panel regression models to explain the current account/GDP ratios of 61 countries. We use these models to assess preliminary hypotheses regarding the determinants of current account balances, and we also assess the extent to which our models can explain the international pattern of current account balances that has emerged in recent years, particularly the U.S. deficit and developing Asian surpluses.

To summarize our key results, we find that a regression model comprised of the standard determinants of the current account identified in the literature-per capita income, output growth, fiscal balances, net foreign assets, economic openness, and demographic variables-can explain neither the large U.S. current account deficit of recent years nor the large developing Asian surpluses. This tends to confirm suspicions that whatever is causing these outsized external imbalances, it is something not readily explained by conventional theory.

However, a variant of our standard model that is augmented by a variable representing the incidence of financial crisis does do a good job of explaining the emergence of developing Asia's current account surpluses. Financial crises persistently restrain both the supply and demand for credit, depressing domestic demand and boosting external balances. The financial crises in developing Asia in the late 1990s apparently played a key role in promoting surpluses, both directly by restraining domestic spending, particularly investment, and, perhaps, indirectly by encouraging the authorities to take measures to keep their exchange rates competitive.

Even though our augmented model can explain why the Asian economies moved into surplus, it does not explain why the U.S. economy moved so deep into deficit. (In fact, the model predicts a small surplus for the United States in the recent period.) Put another way, the financial crisis that swept developing Asia in the late 1990s apparently contributed to the subsequent substantial capital outflows from that region, and thus to what Bernanke (2005) has referred to as a ``global savings glut''. However, it remains unclear why those surplus savings ended up in the United States rather than being spread more evenly throughout the world.

Analysts have posited several factors that could account for investors' special attraction to U.S. assets in recent years, including the United States' strong growth, reliable investor protections, and market-friendly regulations. We find that in many specifications of our model, a variable representing the change in output growth significantly lowers the current account balance. Additionally, favorable scores on measures of the quality of government institutions are associated with statistically significant reductions in current account balances. Even so, our model fails to predict the substantial U.S. current account deficits of recent years, and still predicts a small surplus.

While the model does poorly at predicting the actual magnitude of the U.S. current account deficit it does correctly predict a weaker balance in recent years for the United States than for the developing Asian economies in aggregate. Better institutions in the United States, in combination with slowing growth and the financial crisis in Asia, lead the model to predict relatively higher current account balances in Asia than in the United States, even taking into account the United States' much higher level of economic development.

The plan of this paper is as follows. Section II reviews different explanations that have been put forward for the emergence of large external imbalances in recent years. Section III describes

Kết quả (Việt) 1:

Giải thích các mô hình toàn cầu của sự mất cân bằng tài khoản hiện tạiJoseph W. Gruber và Steven B. Kamin1Lưu ý: Các giấy tờ thảo luận tài chính quốc tế là sơ bộ tài liệu lưu hành để kích thích thảo luận và nhận xét quan trọng. Tài liệu tham khảo để giấy tờ thảo luận tài chính quốc tế (khác hơn là một sự thừa nhận rằng các nhà văn đã có quyền truy cập vào các tài liệu chưa được công bố) nên được xóa với tác giả hoặc tác giả. Tại IFDPs có sẵn trên Web tại http://www.federalreserve.gov/pubs/ifdp/. Bài báo này có thể được tải về miễn phí từ thư viện Khoa học xã hội nghiên cứu mạng điện tử tại http://www.ssrn.com/.Tóm tắt:This paper assesses some of the explanations that have been put forward for the global pattern of current account imbalances that has emerged in recent years: in particular, the large U.S. current account deficit and the large surpluses of the Asian developing economies. Based on the approach developed by Chinn and Prasad (2003), we use data for 61 countries during 1982-2003 to estimate panel regression models for the ratio of the current account balance to GDP. We find that a model that includes as its explanatory variables the standard determinants of current accounts proposed in the literature-per capita income, relative growth rates, the fiscal balance, demographic variables, and economic openness-can account for neither the large U.S. deficit nor large Asian surpluses of the 1997-2003 period. However, when we include a variable representing financial crises, which might be expected to restrain domestic demand and boost the current account balance, the model explains much of developing Asia's swing into surplus since 1997. Even so, the model cannot explain why the capital outflows associated with Asia's current account surpluses were channeled primarily into the U.S. economy. Observers have pointed to strong growth performance and a favorable institutional environment as elements attracting foreign investment into the United States, and we found strong evidence that good performance in these areas significantly reduces the current account balance. While a model incorporating these factors still fails to predict the large U.S. current account deficit (and, in fact, predicts a slight surplus), it does predict a U.S. current account balance that is relatively weaker than the aggregate balance of developing Asia.Keywords: Current account, financial crisis, capital flowsJEL classification: F21, F32I. IntroductionThe pattern of global current account imbalances has received considerable attention in recent years. Most prominently, the U.S. current account deficit has widened from $125 billion in 1995 to $668 billion in 2004 (shown in Figure 1), or from 1.5 percent of GDP to 5.7 percent of GDP. This deficit is mirrored in some equally marked surpluses on the part of some of the United States' trading partners. The current account balances of major developing East Asian economies (China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand) have moved from an aggregate deficit of $27 billion in 1995 to a surplus of $186 billion in 2004, or from negative 1.2 percent of GDP to positive 5.3 percent of GDP. More generally, the aggregate current account balance of the developing countries moved into surplus starting in 2000.The present pattern of external imbalances appears inconsistent with the standard view that mature industrial economies should be exporting capital to poor developing countries. Because developing countries have higher labor/capital ratios, they should in principle have higher marginal productivities of capital and thus attract capital from labor-poor industrial economies. Moreover, if developing countries can expect faster income growth as they catch up to industrial countries, this provides an incentive for them to borrow against their higher future income, also leading to current account deficits.
There is no consensus explanation for the current pattern of international capital flows, and many hypotheses have been put forward: U.S. fiscal deficits; declines in U.S. private saving; the surge in U.S. productivity growth; increases in global financial intermediation; a global savings glut; a rash of emerging market financial crises; and exchange rate pegs by our trading partners. However, many of these factors are quite amorphous, and it has been difficult to muster support for one explanation against another.

By the same token, it has been even more difficult to assess all of the proposed factors jointly and compare their separate contributions to the international pattern of current account imbalances. Ferguson (2005) reports one of the few attempts to conduct such as exercise. The Federal Reserve staff's open economy macroeconomic simulation model is used to gauge the contribution of different shocks to the evolution of the U.S. trade deficit. The widening of the deficit is attributed primarily to the rise in U.S. productivity growth, a fall in the risk premium on dollar assets, and the weakening of foreign domestic demand; other factors, including the U.S. fiscal deficit and decline in private saving, receive less weight in the decomposition analysis. This exercise is undeniably useful in enhancing our understanding of the roots of the U.S. trade deficit. Nevertheless, the simulation model is unlikely to precisely capture the economic linkages involved in the determination of the external balance, and identifying the quantitative magnitude of the shocks affecting the trade deficit is both difficult and subjective.

In this paper, we adopt a more empirical but less structured approach to explaining the recent emergence of large current account imbalances. Our approach jumps off from the influential research of Chinn and Prasad (2003).2 Chinn and Prasad developed a large multi-country database for the period 1971-1995 and estimated a battery of cross-sectional and panel regressions relating current account/GDP ratios to a wide range of potential determinants, including, among others, the fiscal deficit, net foreign asset position, per capita income, output growth, demographic variables, terms of trade volatility, and openness to trade. Based on a similar approach, but with altered specifications and data extending through 2003, we estimate panel regression models to explain the current account/GDP ratios of 61 countries. We use these models to assess preliminary hypotheses regarding the determinants of current account balances, and we also assess the extent to which our models can explain the international pattern of current account balances that has emerged in recent years, particularly the U.S. deficit and developing Asian surpluses.

To summarize our key results, we find that a regression model comprised of the standard determinants of the current account identified in the literature-per capita income, output growth, fiscal balances, net foreign assets, economic openness, and demographic variables-can explain neither the large U.S. current account deficit of recent years nor the large developing Asian surpluses. This tends to confirm suspicions that whatever is causing these outsized external imbalances, it is something not readily explained by conventional theory.

However, a variant of our standard model that is augmented by a variable representing the incidence of financial crisis does do a good job of explaining the emergence of developing Asia's current account surpluses. Financial crises persistently restrain both the supply and demand for credit, depressing domestic demand and boosting external balances. The financial crises in developing Asia in the late 1990s apparently played a key role in promoting surpluses, both directly by restraining domestic spending, particularly investment, and, perhaps, indirectly by encouraging the authorities to take measures to keep their exchange rates competitive.

Even though our augmented model can explain why the Asian economies moved into surplus, it does not explain why the U.S. economy moved so deep into deficit. (In fact, the model predicts a small surplus for the United States in the recent period.) Put another way, the financial crisis that swept developing Asia in the late 1990s apparently contributed to the subsequent substantial capital outflows from that region, and thus to what Bernanke (2005) has referred to as a ``global savings glut''. However, it remains unclear why those surplus savings ended up in the United States rather than being spread more evenly throughout the world.

Analysts have posited several factors that could account for investors' special attraction to U.S. assets in recent years, including the United States' strong growth, reliable investor protections, and market-friendly regulations. We find that in many specifications of our model, a variable representing the change in output growth significantly lowers the current account balance. Additionally, favorable scores on measures of the quality of government institutions are associated with statistically significant reductions in current account balances. Even so, our model fails to predict the substantial U.S. current account deficits of recent years, and still predicts a small surplus.

While the model does poorly at predicting the actual magnitude of the U.S. current account deficit it does correctly predict a weaker balance in recent years for the United States than for the developing Asian economies in aggregate. Better institutions in the United States, in combination with slowing growth and the financial crisis in Asia, lead the model to predict relatively higher current account balances in Asia than in the United States, even taking into account the United States' much higher level of economic development.

The plan of this paper is as follows. Section II reviews different explanations that have been put forward for the emergence of large external imbalances in recent years. Section III describes