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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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References

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  1. Pierre-Olivier Gourinchas & Olivier Jeanne, 2007. "Capital Flows to Developing Countries: The Allocation Puzzle," NBER Working Papers 13602, National Bureau of Economic Research, Inc.
  2. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," NBER Working Papers 11996, National Bureau of Economic Research, Inc.
  3. Olivier Blanchard, 2007. "Current Account Deficits in Rich Countries," IMF Staff Papers, Palgrave Macmillan, vol. 54(2), pages 191-219, June.
  4. Christopher D. Carroll & David N. Weil, 1993. "Saving and growth: a reinterpretation," Working Paper Series / Economic Activity Section 140, Board of Governors of the Federal Reserve System (U.S.).
  5. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series qt2tn4w8x6, Department of Economics, UC Santa Cruz.
  6. Ju, Jiandong & Wei, Shang-Jin, 2007. "Domestic Institutions and the Bypass Effect of Financial Globalization," CEPR Discussion Papers 6343, C.E.P.R. Discussion Papers.
  7. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
  8. repec:rus:hseeco:317881 is not listed on IDEAS
  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, vol. 38(1), pages 1-80.
  10. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2004. "Sources for Financing Domestic Capital - is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Center for International Economics, Working Paper Series qt7g18546z, Center for International Economics, UC Santa Cruz.
  11. Joshua Aizenman & Jaewoo Lee, 2006. "Financial Versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding," NBER Working Papers 12718, National Bureau of Economic Research, Inc.
  12. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  13. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund.
  14. Jaewoo Lee & Joshua Aizenman, 2006. "Financial Versus Monetary Mercantilism: Long-Run View of the Large International Reserves Hoarding," IMF Working Papers 06/280, International Monetary Fund.
  15. 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, vol. 26(4), pages 546-569, June.
  16. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," NBER Working Papers 13619, National Bureau of Economic Research, Inc.
  17. Sebastian Edwards, 2007. "On Current Account Surpluses and the Correction of Global Imbalances," NBER Working Papers 12904, National Bureau of Economic Research, Inc.
  18. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June.
  19. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
  20. Robert C. Feenstra & Chang Hong, 2010. "China's Exports and Employment," NBER Chapters, in: China's Growing Role in World Trade, pages 167-199 National Bureau of Economic Research, Inc.
  21. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc.
  22. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
  23. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
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Citations

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Cited by:
  1. Aizenman, Joshua & Sengupta, Rajeswari, 2010. "Global Imbalances: Is Germany the new China? A Skeptical View," Santa Cruz Department of Economics, Working Paper Series qt3zx245jn, Department of Economics, UC Santa Cruz.
  2. Blaise Gnimassoun & Valérie Mignon, 2014. "How macroeconomic imbalances interact? Evidence from a panel VAR analysis," EconomiX Working Papers 2014-5, University of Paris West - Nanterre la Défense, EconomiX.
  3. Jesmin Rahman, 2008. "Current Account Developments in New Member States of the European Union: Equilibrium, Excess, and EU-Phoria," IMF Working Papers 08/92, International Monetary Fund.
  4. Dumitru, Ionut & Dumitru, Ionela, 2009. "An Assessment of the Current Account Sustainability in Romania – An Inter-temporal Perspective," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 6(2), pages 23-41, June.
  5. Issiaka Coulibaly & Blaise Gnimassoun, 2013. "Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?," EconomiX Working Papers 2013-42, University of Paris West - Nanterre la Défense, EconomiX.
  6. Bolos Marcel & Otgon Cristian & Pop Razvan, 2011. "Substantiation Of The Public Debt Sustainability Using Kalman Filter," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 323-334, December.
  7. Chris Hunt, 2008. "Financial turmoil and global imbalances: the end of Bretton Woods II?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 71, September.
  8. Aizenman, Joshua & Lee, Minsoo & Park, Donghyun, 2012. "The Relationship between Structural Change and Inequality: A Conceptual Overview with Special Reference to Developing Asia," ADBI Working Papers 396, Asian Development Bank Institute.
  9. Joshua Aizenman & Yothin Jinjarak & Nancy P. Marion, 2013. "China's Growth, Stability, and Use of International Reserves," NBER Working Papers 19739, National Bureau of Economic Research, Inc.
  10. Herrmann, Sabine & Winkler, Adalbert, 2009. "Real convergence, financial markets, and the current account - Emerging Europe versus emerging Asia," The North American Journal of Economics and Finance, Elsevier, vol. 20(2), pages 100-123, August.
  11. Aizenman, Joshua & Jinjarak, Yothin & Marion, Nancy P., 2014. "The People's Republic of China's Growth, Stability, and Use of International Reserves," ADBI Working Papers 455, Asian Development Bank Institute.
  12. Dimitris K. Christopoulos & Miguel León-Ledesma, 2004. "Current Account Sustainability in the US: What Do We Really Know About It?," Studies in Economics 0412, Department of Economics, University of Kent.
  13. Smith, Constance, 2011. "External Balance Adjustment: An Intra-National and International Comparison," Working Papers 2011-13, University of Alberta, Department of Economics.
  14. Joshua Aizenman & Yothin Jinjarak, 2008. "The US as the "Demander of Last Resort" and its Implications on China's Current Account," NBER Working Papers 14453, National Bureau of Economic Research, Inc.
  15. Körner, Finn Marten, 2011. "An equilibrium model of 'global imbalances' revisited," Violette Reihe Arbeitspapiere 33/2011, Promotionsschwerpunkt "Globalisierung und Beschaeftigung".
  16. Aizenman, Joshua & Jinjarak, Yothin, 2008. "The US as the “demander of last resort†and its implications on China’s current account," Santa Cruz Department of Economics, Working Paper Series qt986646mz, Department of Economics, UC Santa Cruz.

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