3 - Current Account Imbalances: The Role of Official Capital Flows

Abstract

The chapter entitled “Current Account Imbalances: The Role of Official Capital Flows” establishes a link between the structure of the international monetary system, global imbalances and the US current account deficit. It shows that global imbalances are the natural outcome of a monetary system based on the dollar as key currency. Our panel data analysis over the period 1970–2009 confirms the hypothesis that the global demand for reserve assets by central banks lowers the current account balance of the reserve-issuing country: Any dollar of provided reserve assets decreases the US current account by more than one dollar. The flip side of this effect is a higher current account balance in reserve-accumulating countries. The empirical results are corroborated by an application of the portfolio balance model. These novel findings show that the worldwide demand for international reserves has contributed to the buildup of global imbalances.