International Economic Cooperation，Domestic Economic Stability and the Improvement of Current Account Imbalances

Abstract

After 2008, the barriers to cross-border flows of production factors such as commodities, capital, and labor have become increasingly apparent. The new round of liberalism has quietly risen, triggering a wave of counter-globalization characterized by anti-free trade and anti-integration”. Some developed countries have attempted to go beyond the constraints of the structural adjustment of the global economy and embark on the so-called priority of interest and self-development”. This, to a certain extent, weakened the synchronization of the world economic cycle and objectively exacerbated the synthetic fallacy” in the global economic development. In the absence of effective international economic rules and regulations, this synthetic fallacy” may cause frictions in trade, finance, and other areas to increase, thereby accelerating current account imbalances.Based on the above facts, this paper regards current account imbalances as the result of the internal and external factors, and combines the changes in the economic globalization process with macroeconomic uncertainty to explore whether the synchronization between China and the world economic cycle has changed. Is there any uncertainty in China’s macro-economy, and how does it affect current account imbalances, accelerating or smoothing? If the synchronization between China and the world economic cycle is reduced and macroeconomic uncertainty is raised, will it accelerate current account imbalances? What is the impact? Firstly, the method of real-time measurement of macroeconomic uncertainty using large-scale mixed macroeconomic data sets is proposed, and the macroeconomic uncertainty index is constructed. It avoids the possibility of directly using the substitution variables such as financial market volatility in the past literature to reflect the possible deviation of macroeconomic uncertainty. Then we use the Markov framework to establish a macroeconomic cycle synchronization index. Finally, the vector autoregressive model with Bayesian variable selection （VAR-BVS） weakens the endogeneity problem caused by missing or mistaken variables, and analyzes the dynamic relationship between the three before and after the global financial crisis. The study examines the possible links between the three.The study finds that: The relationship between the two is similar to a U-shape curve with the synchronization of the world economic cycle as the horizontal axis and current account imbalances growth rate as the vertical axis. Whether before or after the crisis, macroeconomic uncertainty plays an accelerator” role in current account imbalances. In the long term, the increase in macroeconomic uncertainty has an accelerating effect on current account imbalances. In the short term, in addition to the impact of the domestic economic environment, the decline in the synchronization of the world economic cycle will play an important role in accelerating current account imbalances. The reason for the synchronization between China and the world economic cycle, and macroeconomic uncertainty affecting current account imbalances may be due to the international division of labor, factor mobility, and preventive savings motivation. There is structural heterogeneity in the relationship between domestic and foreign economic environment and current account imbalances, which is different from the relationship between trade in goods and trade in services. The findings show that a stable domestic economic environment and a cooperative international economic environment are important conditions to improve current account imbalances.