Comovement and Global Imbalances of Current Accounts

Abstract

In contrast to existing studies that have paid limited attention to comovement in the current account balances of inter-related countries, we employ a dynamic factor model to evaluate the contributions of the common global factor, group factors (advanced or emerging countries), and country-specific factors for 12 advanced and eight emerging economies from 1970 to 2017. We find that current account balances are largely driven by the group factor for advanced economies; however, current account balances in most emerging economies are primarily driven by country-specific factors. We then investigate the roles of these factors using the traditional empirical model for current account determination. Global and group factors are essential for addressing current accounts’ cross-sectional dependence in panel data models. We find that the empirical results introducing these factors are stronger, and the coefficients of relevant variables become more significant. Furthermore, we examine how these factors are related to the structural determinants of current account balances, revealing that more capital mobility and trade openness tend to increase the share of the group factor, while increases in country-specific determinants lead to a greater share in the country factor.