Abstract
This study aims to find out the fundamental macroeconomic, institutional and financial determinants of current account balances by using panel data analysis method. The analysis is carried out by using the data for the period between 1986 and 2013 of 97 developing and developed countries. We find that the determinants of current account balances can be related to the factors such as fiscal balance, growth, terms of trade, exchange rate, trade openness, stage of economic development, oil dependency, financial market development, macroeconomic stability and institutional quality. A rise in growth rate, real effective exchange rate, fiscal deficit, trade openness, institutional quality, financial market development and stage of development generates larger current account deficits. A rise in terms of trade, inflation rate (representing macroeconomic stability), crude oil export reduces the current account deficits. For industrial countries, macroeconomic stability and growth also have the opposite effect on current account balances compared with other groups. The legal system and property rights, voice and accountability, political stability and absence of violence, political risks are identified as the institutional determinants of current account balances.
Highlights
After late-1990s current account positions of the major economies have started to change
3 Data and methodology This study aims to find out the fundamental macroeconomic, institutional and financial determinants of current account balances by using panel data analysis method
We find that the determinants of current account balances can be related to the factors such as fiscal balance, growth, terms of trade, exchange rate, trade openness, stage of economic development, oil dependency, financial market development, macroeconomic stability and institutional quality
Summary
After late-1990s current account positions of the major economies have started to change. Global imbalances began to widen to exceed 5% of GDP in 2008 from 2% in 1996. The most significant change was widening in the current account deficit of the USA from less than 2% of GDP in 1997 to 5.8% in 2006. The USA has started to run a current account deficit since 1992. In Europe, the UK, France, Italy, Poland and Greece are some of the countries have run current account deficits for some years during that period. Germany has run current account surplus between 2002 and 2014. In Far East Asia, Japan has run current account surplus between 1981 and 2013. South Korea, Malaysia and Singapore have run current account surplus since 1998. China has run 20 years of surplus since 1994.
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