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Globalization and the Sustainability of Large Current Account Imbalances: Size Matters

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  • Aizenman, Joshua
  • Sun, Yi

Abstract

This paper evaluates the sustainability of large current account imbalances in the era when the Chinese GDP growth rate and current account/GDP exceed 10%. We investigate the size distribution and the durability of current account deficits during 1966-2005, and report the results of a simulation that relies on the adding-up property of global current account balances. Excluding the US, we find that size does matter: the length of current account deficit spells is negatively related to the relative size of the countries’ GDP. We conclude that the continuation of the fast growth rate of China, while maintaining its large current account/GPD surpluses, would be constrained by the limited sustainability of the larger current account deficits/GDP of courtiers that grow at a much slower rate. Consequently, short of the emergence of a “new demander of last resort,†the Chinese growth path would be challenged by its own success.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt4s3478nz.

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Date of creation: 01 Nov 2009
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Handle: RePEc:cdl:ucscec:qt4s3478nz

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Keywords: current account imbalances; growth; size; adding-up property; Social and Behavioral Sciences;

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  1. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
  2. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2007. "Sources for financing domestic capital - Is foreign saving a viable option for developing countries?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(5), pages 682-702, September.
  3. Chinn, Menzie D. & Ito, Hiro, 2007. "Current account balances, financial development and institutions: Assaying the world "saving glut"," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(4), pages 546-569, June.
  4. Carroll, Christopher D. & Weil, David N., 1994. "Saving and growth: a reinterpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 40(1), pages 133-192, June.
  5. Jaewoo Lee & Joshua Aizenman, 2006. "Financial Versus Monetary Mercantilism," IMF Working Papers, International Monetary Fund 06/280, International Monetary Fund.
  6. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, Elsevier, vol. 87(1), pages 115-143, August.
  7. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An Equilibrium Model of Global Imbalances and Low Interest Rates," 2006 Meeting Papers, Society for Economic Dynamics 894, Society for Economic Dynamics.
  8. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series, Department of Economics, UC Santa Cruz qt2tn4w8x6, Department of Economics, UC Santa Cruz.
  9. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 1-80.
  10. Jiandong Ju & Shang-Jin Wei, 2010. "Domestic Institutions and the Bypass Effect of Financial Globalization," Working Papers, Hong Kong Institute for Monetary Research 222010, Hong Kong Institute for Monetary Research.
  11. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries," IMF Working Papers, International Monetary Fund 06/229, International Monetary Fund.
  12. Robert C. Feenstra & Chang Hong, 2007. "China's Exports and Employment," NBER Working Papers, National Bureau of Economic Research, Inc 13552, National Bureau of Economic Research, Inc.
  13. Olivier Blanchard, 2007. "Current Account Deficits in Rich Countries," NBER Working Papers, National Bureau of Economic Research, Inc 12925, National Bureau of Economic Research, Inc.
  14. Pierre-Olivier Gourinchas & Olivier Jeanne, 2007. "Capital Flows to Developing Countries: The Allocation Puzzle," NBER Working Papers, National Bureau of Economic Research, Inc 13602, National Bureau of Economic Research, Inc.
  15. Joshua Aizenman & Jaewoo Lee, 2008. "Financial versus Monetary Mercantilism: Long-run View of Large International Reserves Hoarding," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 31(5), pages 593-611, 05.
  16. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 341-355, June.
  17. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers, National Bureau of Economic Research, Inc 10276, National Bureau of Economic Research, Inc.
  18. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers, National Bureau of Economic Research, Inc 11541, National Bureau of Economic Research, Inc.
  19. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
  20. Sebastian Edwards, 2007. "On Current Account Surpluses and the Correction of Global Imbalances," NBER Working Papers, National Bureau of Economic Research, Inc 12904, National Bureau of Economic Research, Inc.
  21. repec:rus:hseeco:317881 is not listed on IDEAS
  22. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
  23. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs, Peterson Institute for International Economics PB05-03, Peterson Institute for International Economics.
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