Determinants of Current Account Imbalance in the Global Economy: A Dynamic Panel Analysis

Debasish Kumar Das

doi:10.2139/ssrn.2254288

Abstract

This research presents an empirical investigation of the determinants of current account imbalance for the large sample of developed, emerging and developing countries during 1980-2011. Using dynamic panel GMM techniques, this study characterizes that current account balance are positively correlated with net foreign assets, trade openness and exchange rate stability and negatively associated with commodity price, real GDP growth and real effective exchange rate for the developed countries. While, among emerging countries, commodity price, real GDP growth, trade openness and de-jure capital openness is positively and net foreign asset, exchange rate stability index is negatively related with current account balance. These findings suggest that the current account determinants explain different characteristics in terms of different country groups. The results also hold Chinn and Ito (2007) and Chinn and Prasad (2003) along with three more important determinants with significant influence on current account which have not ever considered in literature.

Highlights

Today the world aggregate current account balances as a share of global output are twice as large as in mid-1980s, while the net foreign asset positions have boosted up threefold (Bracke et al 2010)
6 Results This section presents the estimation results, which aims to find the determinants of current account imbalances in the global economy
The test specification exhibits that in all series the null hypothesis is rejected. This implies that there is no cointegrated relationship because the current account balance is stationary series in panel countries during the sample period

Summary

Introduction

Today the world aggregate current account balances as a share of global output are twice as large as in mid-1980s, while the net foreign asset positions have boosted up threefold (Bracke et al 2010). Global current account imbalance is rising with the USA and other major developed economies running a persistent current account deficit against some emerging market countries with big surpluses. The Eurozone current account deficit has widened over 4 % of GDP in 2008. This unexpected rise in current account deficit beyond historical standard has received a substantial attention in recent year. China and other Asian Tigers (South Korea, Malaysia, Singapore, Indonesia and Thailand) are running current account surplus on an average 6.4 % of GDP in 2000–2009 which put forward them to one of the world’s largest lender. In spite of having rapid growth and enormous domestic investment opportunities, these economies have increasingly been outflowing a major portion of their savings to foreign countries. Other emerging economies including Mexico, Argentina, Brazil and Middle

Objectives

Results

Conclusion