Download Current Account Balances, Financial Development & Institutions

Is There a “Global Saving Glut”?
And Is It the Cause of the US
Current Account Deficit?
Menzie D.Chinn
University of Wisconsin and NBER
Presentation at NABE Panel
“International Capital Flows”
ASSA, Chicago, January 6, 2007
Anticipating the Answers
• Maybe (better
investment drought)
• Maybe
Too Obvious a Question?
• Long term real
rates are low
• The U.S. CA
deficit seems
anomalously
large
• The East Asian
surpluses appear
anomalously
large
Are Real Long Term Rates and the
CA Moving Together?
.02
.01
.10
CA/GDP
(left scale)
.09
.00
.08
-.01
.07
-.02
.06
-.03
.05
-.04
.04
-.05
-.06
-.07
Real 10
Year T-Bill
(right scale)
.03
.02
.01
80 82 84 86 88 90 92 94 96 98 00 02 04
Note: 10 yr const. mat adjusted by Livingstone, Blue Chip, SPF 10 year expected infl.
US Long Term Real Rates
5
4
30 yr TIP
(4/28) yield
3
2
Expected inflation
adjusted ten year
constant maturity
yield
1
10 yr TIP
(1/08) yield
0
1992
1994
1996
1998
2000
Source: St. Louis Fed, Philadelphia Fed
2002
2004
2006
World Real Rates
Inflation indexed
5
US
4
3
UK
2
1
France
0
82
84
86
88
90
Source: BIS, St. Louis Fed
92
94
96
98
00
02
04
06
Is the US Deficit Too Large?
y i ,t    X i , t B  Z i ,t   u i ,t
• Panel regression approach
• 1971-2004, 21 industrial, 97 developing
countries (WDI), in five year panels
• Include time fixed effects
• X are macro variables
• Z are financial development, institutional
variables (credit; law & order)
Source: M.Chinn & H. Ito, “Assaying the World Saving Glut”,
http://www.ssc.wisc.edu/~mchinn/CA_Chinn_Ito.pdf
Gov’t budget balance
Net foreign assets (initial)
Relative income
Relative income squared
Rel. dependency ratio (young)
Rel. dependency ratio (old)
(1)
Full
(2)
IDC
(3)
LDC
0.15
[0.068]**
0.049
[0.005]***
0.027
[0.019]
0.016
[0.029]
-0.06
[0.020]***
-0.205
[0.061]***
0.16
[0.086]*
0.063
[0.011]***
0.059
[0.025]**
-0.212
[0.080]***
0.021
[0.073]
0.001
[0.081]
0.15
[0.081]*
0.047
[0.005]***
0.032
[0.085]
0.008
[0.096]
-0.071
[0.025]***
-0.313
[0.093]***
Pooled OLS estimates on 5 year averaged data
Is the US Deficit Too Large?
• Short
answer:
Barely,
according
to statistical
level
• Budget
deficit is
important
Model Specifications
Estimated
Coefficient
w/ five-year average data
(0) Pooled OLS
0.160*
(1) Fixed Effects
0.377***
(2) 2SLS – IV w/out institutional vars
0.325**
(3) 2SLS – IV w/ institutional vars
0.448*
w/ HP-filtered annual data
(4) HP – OLS w/out institutional vars
0.125***
(5) HP – OLS w/ institutional vars
0.095**
(6) HP – Fixed Effects
0.485***
(7) HP – GLS w/out inst. vars
0.375***
(8) HP – GLS w/ inst. vars
0.326***
US In-Sample Fit
-.06 -.05 -.04 -.03 -.02 -.01
0
.01 .02
United States
1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2004
period
Current Account % of GDP
lower limit
Fitted values
upper limit
Reality Check
Between 2000 and 2005, there was
approximately a 4.3 percentage point
swing in the US Federal budget
balance, and a 2.2 percentage point
swing in the U.S. current account
balance. This outcome is consistent
with a 0.5 coefficient.
Is the E.Asia Surplus Too Large?
Government budget balance
Net foreign assets (initial)
Relative income
Relative income squared
Dependency ratio (young)
Dependency ratio (old)
Financial Develop. (PCGDP)
Legal development (LEGAL)
PCGDP x LEGAL
(2)
(4)
Less
Developed
(LDC)
EMG
0.168
[0.079]**
0.047
[0.005]***
0.115
[0.096]
0.057
[0.102]
-0.076
[0.022]***
-0.368
[0.096]***
-0.043
[0.032]
-0.017
[0.008]**
-0.021
[0.011]*
0.23
[0.075]***
0.041
[0.009]***
0.216
[0.103]**
0.166
[0.111]
-0.044
[0.023]*
-0.529
[0.127]***
-0.082
[0.038]**
-0.018
[0.010]*
-0.037
[0.016]**
-.04
-.02
0
.02
.04
.06
China
1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2004
period
Current Account % of GDP
lower limit
Fitted values
upper limit
-.08 -.06 -.04 -.02
0
.02 .04 .06 .08
Emerging Asia excluding China
1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2004
period
ea_current_m5
lower limit
yhat_ea_w
upper limit
-.1
-.08 -.06 -.04 -.02
0
.02 .04 .06 .08
Korea
1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2004
period
Current Account % of GDP
lower limit
Fitted values
upper limit
How Can Low Rates and
Imbalances Be Reconciled?
NSUS’
REAsia
NSEAsia
RUS
IUS
IEAsia
NSUS
R0
R1
CA1EAsia > 0
CA1US < 0
Can Financial Development
Rescue the US?
•KAOPEN [0, 4.38]
Low
10
percentile
(0.66)
Mean
(1.90)
High
10
percentile
(3.96)
Low
10 percentile
(1.66)
0.528
0.503
0.462
Mean
(2.96)
0.058
0.033
-0.008
High
10 percentile
(4.50)
-0.523
-0.548
-0.589
•Asian Emerging market
countries
•LEGAL
[0, 6.51]
Where Does E. Asia Stand?
•
KAOPEN
Low
10 percentile
(0.66)
Low
10 percentile
(1.66)
•
LEGAL
Mean
(2.93)
High
10 percentile
(4.50)
Bangladesh
China
Mean
(1.90)
High
10 percentile
(3.96)
Indonesia,
Philippines,
Sri Lanka
India, Korea,
Malaysia,
Thailand,
ex-China EA
Hong Kong,
Singapore
Ending Thoughts
• Most of the debate has been cast in
identities, or simple bivariate relationships
• Chinn-Ito quantify the uncertainty
surrounding the CA balance relationship
• There is something to the saving glut story
• But there is also a role for budget deficits
• Financial development may or may not
help reduce the saving glut