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East Asia and Global Imbalances: Saving, Investment, and Financial Development

In: Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, Volume 18

  • Hiro Ito
  • Menzie Chinn

We investigate the role of budget balances, financial development and openness, in the evolution of global imbalances. Financial development -- or the lack thereof -- has received considerable attention as a possible contributing factor to the development of persistent and expanding current account imbalances. Several observers have argued that the depth and sophistication of US capital markets have caused capital to flow from relatively underdeveloped East Asian financial markets. In this paper, we extend our previous work by examining the effect of different types and aspects of financial development. Our cross-country analysis, encompassing a sample of 19 industrialized countries and 70 developing countries for the period of 1986 through 2005, yields a number of new results. First, we confirm a role for budget balances in industrial countries when bond markets are incorporated. Second, empirically both credit to the private sector and stock market capitalization appear to be equally important determinants of current account behavior. Third, while increases in the size of financial markets induce a decline in the current account balance in industrial countries, the reverse is more often the case for developing countries, especially when other measures of financial development are included. However, because of nonlinearities incorporated into the specifications, this characterization is conditional upon other factors. Fourth, a greater degree of financial openness is typically associated with a smaller current account balance in developing countries.

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This chapter was published in:
  • Takatoshi Ito & Andrew K. Rose, 2009. "Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, Volume 18," NBER Books, National Bureau of Economic Research, Inc, number ito_07-2, July.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0432.
    Handle: RePEc:nbr:nberch:0432
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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