Working Paper: NBER ID: w12904
Authors: Sebastian Edwards
Abstract: In this paper I analyze the nature of external adjustments in current account surplus countries. I ask whether a realignment of world growth rates -- with Japan and Europe growing faster, and the U.S. growing more slowly -- is likely to solve the current situation of global imbalances. The main findings may be summarized as follows: (a) There is an important asymmetry between current account deficits and surpluses. (b) Large surpluses exhibit little persistence through time. (c) Large and abrupt reductions in surpluses are a rare phenomenon. (d) A decline in GDP growth, relative to long term trend, of 1 percentage point results in an improvement in the current account balance -- higher surplus or lower deficit -- of one quarter of a percentage point of GDP. Taken together, these results indicate that a realignment of global growth -- with Japan and the Euro Zone growing faster, and the U.S. moderating its growth -- would only make a modest contribution towards the resolution of global imbalances. This means that, even if there is a realignment of global growth, the world is likely to need significant exchange rate movements. This analysis also suggests that a reduction in China's (very) large surplus will be needed if global imbalances are to be resolved.
Keywords: current account; global imbalances; surpluses; deficits; exchange rates
JEL Codes: F02; F31; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decline in GDP growth relative to its long-term trend by 1 percentage point (F62) | improvement in the current account balance by one-quarter of a percentage point of GDP (F32) |
| large surpluses (H62) | persistence through time (C41) |
| realignment of global growth rates (F62) | modest contribution towards resolving global imbalances (F32) |
| large and abrupt reductions in surpluses (H62) | potential sudden stops of capital inflows in deficit countries (F32) |
| macroeconomic variables such as inflation, interest rates, and exchange rates (E31) | behave differently during adjustment periods (E71) |