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Are Global Imbalances Sustainable?: Shedding Further Light on the Causes of Current Account Reversals

  • Luiz de Mello
  • Pier Carlo Padoan
  • Linda Rousová

Large shifts in countries’ external current account positions can be disruptive, often reflecting sudden stops in the flows of external finance and leading to exchange rate and banking crises. As a result, an empirical literature has emerged on the sustainability of, and the determinants of large swings in, current account positions. We shed further light on this issue by testing for the presence of unit roots in the current account balance-to-GDP ratios of a large set of mature and emerging-market economies using a methodology that allows for structural breaks in intercepts and trends. We then construct a chronology of current account reversals that is consistent with sustainability of external positions and use it to estimate the factors explaining the likelihood and magnitude of such reversals using a selection model with ordered probit in the first stage. We find that most of the factors that explain the probability of reversals, such as trends in capital flows, in the budget balance and in external positions, also influence their magnitude. But there are a few exceptions. For instance, the stance of monetary policy and the magnitude of external imbalances prior to a reversal seem to be more powerful predictors of the probability of reversals than of their magnitude. Les déséquilibres mondiaux sont-ils viables ? : Mieux comprendre les causes des retournements de balance courante Les amples variations des soldes des paiements courants des pays peuvent avoir des effets perturbateurs, puisqu'elles tiennent souvent à de brusques interruptions des entrées de capitaux extérieurs et débouchent fréquemment sur des crises de change et bancaires. En conséquence, de nombreux travaux empiriques ont été réalisés sur la viabilité des soldes des paiements courants et les déterminants de leurs amples fluctuations. Nous apportons un nouvel éclairage sur cette question en procédant à un test de racine unitaire sur les ratios solde des paiements courants/PIB d'un vaste ensemble d'économies parvenues à maturité et émergentes, à partir d'une méthodologie tenant compte des ruptures structurelles dans les niveaux et les tendances des séries statistiques considérées. Nous établissons ensuite une chronologie des retournements de balance courante concordant avec la viabilité des positions extérieures, et nous l'utilisons pour estimer les facteurs qui expliquent la probabilité et l'ampleur de ces retournements à l'aide d'un modèle de sélection probit ordonné au premier stade. Nous parvenons à la conclusion que la plupart des facteurs qui expliquent la probabilité des retournements, telles que les tendances dans les flux de capitaux, dans le solde budgétaire et dans les positions extérieures, influent également sur leur ampleur. On relève toutefois quelques exceptions. Ainsi, l'orientation de la politique monétaire et l'ampleur des déséquilibres externes avant un retournement semblent être de meilleures variables explicatives de la probabilité des retournements que de leur ampleur.

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File URL: http://dx.doi.org/10.1787/5km4m2x07xhb-en
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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 813.

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Date of creation: 10 Nov 2010
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Handle: RePEc:oec:ecoaaa:813-en
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  1. Gabriele Galati & Guy Debelle, 2005. "Current account adjustment and capital flows," BIS Working Papers 169, Bank for International Settlements.
  2. Caballero, Ricardo & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of 'Global Imbalances' and Low Interest Rates," CEPR Discussion Papers 5573, C.E.P.R. Discussion Papers.
  3. Barry Eichengreen & Muge Adalet, 2005. "Current Account Reversals: Always a Problem?," NBER Working Papers 11634, National Bureau of Economic Research, Inc.
  4. Mike Kennedy & Torsten Sløk, 2005. "Structural Policy Reforms and External Imbalances," OECD Economics Department Working Papers 415, OECD Publishing.
  5. Feng, Jin & He, Lixin & Sato, Hiroshi, 2009. "Public pension and household saving: Evidence from China," BOFIT Discussion Papers 2/2009, Bank of Finland, Institute for Economies in Transition.
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  7. Gian Maria Milesi Ferretti & Assaf Razin, 2000. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Chapters, in: Currency Crises, pages 285-323 National Bureau of Economic Research, Inc.
  8. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
  9. Giuseppe Nicoletti & Steve Golub & Dana Hajkova & Daniel Mirza & Kwang-Yeol Yoo, 2003. "Policies and International Integration: Influences on Trade and Foreign Direct Investment," OECD Economics Department Working Papers 359, OECD Publishing.
  10. Emanuele Baldacci & Ding Ding & David Coady & Giovanni Callegari & Pietro Tommasino & Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Expenditureson Social Programs and Household Consumption in China," IMF Working Papers 10/69, International Monetary Fund.
  11. Christian Aßmann & Jens Boysen-Hogrefe, 2010. "Analysis of current account reversals via regime switching models," Economic Change and Restructuring, Springer, vol. 43(1), pages 21-43, February.
  12. Mendoza, Enrique G & Quadrini, Vincenzo & Ríos-Rull, José-Víctor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers 6149, C.E.P.R. Discussion Papers.
  13. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
  14. Deborah L. Swenson, 2004. "Foreign Investment and the Mediation of Trade Flows," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 609-629, 09.
  15. Jörn Kleinert, 2000. "Growing Trade in Intermediate Goods: Outsourcing, Global Sourcing or Increasing Importance of MNE Networks?," Kiel Working Papers 1006, Kiel Institute for the World Economy.
  16. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
  17. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 300-351, February.
  18. Alberto Bagnai & Stefano Manzocchi, 1999. "Current-Account Reversals in Developing Countries: The Role of Fundamentals," Open Economies Review, Springer, vol. 10(2), pages 143-163, May.
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