Current account surpluses and the correction of global imbalances

In "On Current Account Surpluses and the Correction of Global Imbalances," Sebastian Edwards analyses the nature of external adjustments in current account surplus countries. He asks if a realignment of world growth rates – with Japan and Europe growing faster, and the United States growing more slowly – is likely to solve the current situation of global imbalances.

The main findings:

  • There is an important asymmetry between current account deficits and surpluses.

  • Large surpluses exhibit little persistence through time.

  • Large and abrupt reductions in surpluses are a rare phenomenon.

  • A decline in gross domestic product 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 gross domestic product (GDP).

    Taken together, these results indicate that a realignment of global growth – with Japan and the Euro Zone growing faster, and the United States 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.

    Source: Matt Nesvisky, Current Account Surpluses And The Correction Of Global Imbalances, NBER Digest, September 2007; based upon: Sebastian Edwards, On Current Account Surpluses and the Correction of Global Imbalances, National Bureau of Economic Research, Working Paper No. 12904, February 2007.

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    FMF Policy Bulletin/ 02 October 2007
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