A forensic analysis of global imbalances

We investigate whether the determinants of current account balances changed in the run-up to the 2009 financial crisis. Although changes in the budget balance appear to be an important factor for advanced current account deficit countries such as the USA, the effect of the 'saving glut variables', that is financial development and openness and legal development, has been relatively stable for emerging market countries, suggesting that those factors cannot explain the bulk of current account movements in recent years. We also find a structural break in current account behavior in 2006-8, in emerging market economies in particular, and attribute the anomalous behavior of precrisis current account balances to financial exuberance as opposed to the nature of the fiscal and monetary policy stance. Our projections suggest that absent drastic policy changes, the imbalances of the USA and China are unlikely to disappear.