Intertemporal sustainability of current account imbalances: New evidence from the OECD countries

This study estimates the intertemporal model for the relationship between exports and imports and examines the sustainability of current account deficits (CADs) and the validity of intertemporal budget constraint for 24 Organisation for Economic Co‐operation and Development countries. The standard ordinary least squares (OLS)‐based two‐step Engle and Granger test, the cointegration regression Durbin–Watson (CRDW) test, and the Stock–Watson test performed on the one‐regime model with time‐invariant parameters and no structural break provide mixed support for the presence of cointegration between exports and imports. The recursive least squares‐based cumulative sum of recursive residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ) tests and the OLS‐based Andrews‐Quandt (AQ) and Andrews – Ploberger (AP) tests suggest the presence of structural breaks in the long‐run relationship between exports and imports for a number of countries. The end‐of‐sample new cointegration breakdown tests performed on the OLS, fully modified OLS, and full‐information maximum‐likelihood estimates of the model suggest the presence of cointegration between exports and imports for most countries. The dominant support for cointegration between trade flows points toward the sustainability of CADs and the validity of intertemporal budget constraint. The macroeconomic stabilization policies seem to have been effective in correcting the market failures and maintaining the steady‐state equilibrium relationship between trade flows in the sample countries. The findings of this study have important implications for empirical research. The structural breaks in the cointegrating vector could occur even over the short time periods and at any point in time. It is essentially important to assess the sustainability of the external position in the presence of long‐period as well as short‐period breaks in the cointegrating vector.     

Long-run determinants of current accounts in OECD countries: Lessons for intra-European imbalances

In this paper we study the long-run determinants of current account balances in 21 OECD countries. We define long-run targets to determine whether actual current account balances are in line with their equilibrium values and find that, following the crisis, the United States, Japan and Spain returned towards their targets but that much remains to be done in Austria, Greece and Germany. Using linear and asymmetric panel VECM models, we find that the speed of convergence of external imbalances is much faster in deficit countries than in surplus ones. These results suggest that the adjustment of intra-European imbalances has to take place in both surplus and deficit countries and should be particularly substantial in the former. This revived the old debate of how to get the surplus countries to adjust.     

Current account deficits and sustainability: Evidence from the OECD countries

Whether or not a current account deficit sustainable has important implications for policy. If the current account deficits of a nation is sustainable, then it implies that the government should have no incentive to default on its international debt. In this article we examine whether or not the current account deficits for the OECD countries can be characterized by a unit root process with regime switching. The econometric methodology allows us to distinguish periods that are associated with unsustainable outcomes from those in which the intertemporal national long-run budget constraint (LRBC) holds. Among the main results, it is found that it is very likely that the LRBC will not hold for the Australia, the Czech Republic, Finland, Hungary, New Zealand, Portugal or Spain, thus signifying a red signal that the current account deficits observed during the period were probably not on a sustainable path.     

Trade taxes and the current account

We show that, under some conditions, a temporary import tariff improves the current account, whereas a temporary export tax deteriorates it. Permanent import tariffs and export taxes have an identical, although ambiguous, effect on the current account.     

Does devaluation improve the current account?

This paper incorporates the link between devaluation, foreign interest payments, and the current account into a fairly general macroeconomic model in which exchange rate changes influence aggregate demand through exports, imports, and expenditure as well as aggregate supply via the cost of imported factors of production. On the basis of available statistical estimates of the behavioral and structural parameters of the model, an attempt is made to assess the empirical importance of this link, among others, in a group of highly indebted industrial and developing countries. By and large, the empirical results indicate that high foreign debt and interest payments tend to reduce the short- to medium-run effect of devaluation on national income, especially in the LDCs, but make little difference to its generally positive effect on the current account.     

International macroeconomic fluctuations and the current account

Abstract.  Intertemporal models of the current account generally assume that global shocks do not affect the current account. We use this assumption to identify global and country‐specific shocks in a bivariate VAR of output and the current account. Cross‐country evidence from the G7 economies suggests that this identification works surprisingly well. We then employ our method to collect stylized facts on international macroeconomic fluctuations. We find that long‐term output growth is driven mainly by global factors in most G7 countries and that country‐specific shocks are less persistent and generally less volatile than global shocks. JEL Classification: F41, F43, C32
Fluctuations macroéconomiques internationales et compte courant.  Les modèles inter‐temporels du compte courant postulent généralement que les chocs globaux n'affectent pas le compte courant. On utilise ce postulat pour identifier les chocs globaux et ceux qui sont spécifiques à des pays donnés dans un modèle VAR du produit global et du compte courant. Les résultats transversaux pour les pays du G7 suggèrent que cette forme d'identification donne de très bons résultats. On emploie cette méthode pour examiner des faits stylisés des fluctuations macro‐économiques internationales.Il appert que la croissance à long terme du produit dépend de facteurs globaux dans la plupart des pays du G7 et que les chocs particuliers aux pays ont un impact moins permanent et moins volatile que les chocs globaux.     

Consumption-smoothing and the excessiveness of Greece's current account deficits

This paper investigates whether the sequence of current account deficits experienced in Greece over the 1950–1995 period have been excessive. The degree of excessiveness is gauged by comparing the actual current account series to an optimal current account measure derived from an intertemporal model of current account determination. The findings indicate that optimal consumption smoothing did not take place over the sample period suggesting that the existing restrictions to the free flow of capital were binding. More importantly the stock of net foreign liabilities was found to have been set on an unsustainable path following the 1989/90 balance of payments crisis yet there is clear evidence that this tendency has been gradually reversed during the last couple of years. First version received: October 1996/Final version received: November 1997     

Growth and the current account: Malaysia and Singapore

A foreign trade model is estimated for two South East Asian countries, selected because they represent two extremes as far as the current account balance is concerned—Malaysia, deficit, Singapore, surplus. The specification highlights, (a) the simultaneous interdependence of exports and import flows—a result of what Krugman [1995] denotes as the slicing up of the production process—and, (b) the impact of investment on imports as a result of productivity shocks on the current account. The estimation results point to the instability of the market for foreign exchange. Using an intertemporal framework, a methodology to derive the external long run equilibrium is applied to the estimated model. The implied constraint on domestic growth turns out to be mild. This research has been financed by the Dgicyt under grant PB94-1502, and the Junta de C. y L. under grant SA 35/97. The comments and suggestions of the editor of the journal and an anonymous referee are gratefully acknowledged. The paper has also benefited from the comments of the participants at the Fifty-First International Atlantic Economic Conference, March 13–20, 2001, Athens, Greece, and at the AEA conference on New Financial Instruments and Emerging Markets, Paris, 1998. Any possible remaining errors are the authors.     

Asset prices, exchange rates and the current account

This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance. It employs a Bayesian structural VAR model that requires imposing only a minimum of economically meaningful sign restrictions. We find that equity market shocks and housing price shocks have been major determinants of the US current account in the past, accounting for up to 30% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been less relevant, explaining about 9% and exerting a more temporary effect on the US trade balance. Our findings suggest that large exchange rate movements may not necessarily be the key element of an adjustment of today's large current account imbalances, and that in particular relative global asset price changes could be a potent source of adjustment.     

经常项目逆差会导致货币危机吗

经常项目逆差与货币危机之间存在着相互关系。从理论上分析,汇率变动率可分解为经常项目差额变动率、资本项目差额变动率以及综合影响比率三者之和;但从实证角度看,汇率变动与其影响因素的变动关系相当复杂。研究显示,该关系很难直接通过线性回归模型来表达。通过相关分析,我们揭示出经常项目逆差与汇率贬值存在较明显的正相关关系;汇率贬值与GDP增长有较强的负相关性。但中国的情况似乎有些特殊,仍有待进一步考察。     

Speed of adjustment of the current account: an international comparison

A model of the current account using a mean-reverting Ornstein–Uhlenbeck process is developed and tested for three different measures of the current account. The results show very different adjustment patterns for the current accounts of seven large develpoed countries. This information can be very useful for further detailed analysis of behavior within these individual countries. We find that with the exception of Canada and Japan all countries have a constant long-term mean which, in most cases, was not significantly different from zero. The speed of adjustment to the mean was always between 0 and 1. France and Italy exhibited much more rapid adjustment patterns than did the other five countries.     

Intertemporal current account balance and the East Asian currency crises

Under the assumption that the balance of the current account must satisfy the expected intertemporal balance, this paper seeks to establish a precondition for the recent currency crises in East Asian countries. Whenever current policy violates the expected intertemporal balance, it is argued that future policy changes (possibly including the exchange rate regime) are anticipated. Using Trehan and Walsh's [1991] result that nonstationarity of the change of assets is evidence of a violation of the expected intertemporal balance, this paper calculates the augmented Dickey-Fuller statistics of the current account prior to the East Asian currency crises. In each of these crises, there is evidence of a persistent violation of intertemporal balance prior to the crisis. There is also evidence of countries being affected by the plight of their neighbors. Their currencies depreciated even though it was not necessary. This is a revised version of a paper presented at the Forty-Fifth International Atlantic Economic Conference, Rome, Italy, March 14–21, 1998. The author would like to thank the participants of the conference for their comments. Suggestions from Tsangyao Chang, Wen-Shwo Fang, and Richard Lu at the Feng-Chia University seminar are appreciated. Financial support from the National Science Fund of Taiwan, Republic of China, NSC 88-2415-H-035-010, is greatly appreciated.     

Consumption tilting and the current account: Evidence from Canada

This paper estimates the consumption tilting motive in Canada. A common empirical technique (vector-error correction model) is applied to a well-established theory (the small-open economy present-value model) in order to estimate the long-run behavior of the current account. The results suggest that households are patient. They modify intertemporal consumption profiles in order to tilt consumption toward the future through the accumulation of wealth, which improves the current account in the long run.     

Causality, real estate prices, and the current account

This paper explores the causal relations between real estate prices and the current account using recently developed econometric methods for recursive systems. Using a variety of high-quality real estate indices, we find little evidence that current account deficits (capital account surpluses) directly drove real estate prices in the United States, Spain, and Ireland. There is some evidence for this linkage in England; however it is transitory and not persistent. There is also strong evidence that current account surpluses have direct impacts on mortgage rates in the United States, providing an indirect channel for stimulating the real estate market mediated through the financial markets.     

Wealth effects and the current account with endogenous terms of trade

Portfolio balance models of exchange rate dynamics generally neglect diversification in internationally traded goods. They thereby avoid a difficulty in demonstrating that models allowing such diversification are not globally unstable, as highlighted by Dornbusch and Fischer (1980). This note shows that simple perfect foresight versions of traditional endogenous terms of trade models are unambiguously characterized by saddlepoint stability.     

Credit growth,current account and financial depth

Exploring the determinants and dynamics of the current account balance is one of the priorities of academic literature and policy circles. Although the effects of structural variables are deeply analysed, a lesser attention has been paid to the impact of financial variables. Drawing on standard empirical current account models and with a large sample of industrial and developing countries, we report a significant deterioration in the current account balance in case of an increase in the credit growth. Moreover, we find that this link is substantially stronger for the developing ones motivating a closer examination. Therefore, we further advance our analysis and show that credit growth causes a stronger impact on the current account balance for lower levels of financial depth. In other words, at the early stages of financial development, acceleration in the credit growth might cause a larger deterioration in the current account balance; thus, it might be suggested that monetary policy and macro-prudential measures aimed at preventing financial excess might be more effective to reduce the external imbalances at the early stages of financial deepening.     

Structural change,savings and current account balance

Private savings have experienced remarkable divergences across countries in recent years. In this paper we use a new factor, economic structural changes, to explain the differences of private savings in developing countries and its impacts on current account balance. We point out that growth related structural changes can be decomposed into productivity changes and job reallocations, which will affect private savings differently through wage effect and labor reallocation effect. Wage variation resulting from productivity growth will increase private savings, while labor reallocation moving from low income to high income sectors will reduce savings. Using sector level data, we find strong empirical evidence that structural change patterns have a significant impact on private savings and current account balance. This result provides another way to understand the recent “savings glut” in East Asian countries and also has some implications for the large current account imbalance issue.     

The effect of remittances on the current account in developing and emerging economies

This paper presents an analysis of the effect of remittances on the current account in developing and emerging economies, incorporating an assessment of the extent to which exchange rate regimes impact the relationship. The main findings suggest that there is a positive effect of remittances on the current account contemporaneously, but that the lagged effect is negative, which could be indicative of the existence of some underlying mechanisms characteristic of the Dutch disease phenomenon. In addition, the results show that a more flexible exchange regime dampens the contemporaneous positive effect that remittances have on the current account. The paper, therefore, asserts that policymakers face trade‐offs pertaining to the use of exchange rate policy in managing the effects of remittances on the current account, which should be given due consideration when such policy choices are made.     

A theory of current account and exchange rate determinations

The purpose of this paper is to construct a two-period, two-country model that derives the current account, the exchange rate, the terms of trade, and real interest rates from optimal behavior principles. This is done by constructing a model that uses money mainly as a means of exchange, where the technology of exchange is flexible due to potential substitutability of time and real balances as a means of coordinating transactions. The discussion results in a framework that integrates elements of net saving theories and the monetary approach into a unified structure, in which the two approaches are complementary viewpoints.