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A requiem for ‘blame it on Beijing’: Interpreting rotating global current account surpluses

Global imbalances have reappeared, somewhat transformed, and relocated. Using data from developing and industrialised countries covering 1972-2016, this column shows that fiscal factors, rather than savings glut variables, have accounted for a noticeable share of the recent variation in imbalances, including in the US and Germany. The contribution of demographic factors is large for industrialised countries but not for emerging markets. Net official flows shape global imbalances in both developing and industrialised countries. 

Global imbalances have returned to the fore of policy discussions. In the first decade of the century, before the Global Crisis of 2008, large current account imbalances came under the spotlight. The US and several European countries ran large current account deficits, which appeared to have been financed by large current account surpluses by China, other emerging markets in East Asia, and oil exporters. The nature and importance of expanding current account imbalances – both surpluses and deficits – dominated academic and policy debates. The onset of the Global Crisis, accompanied as it was by a compression of current account balances, side-lined the topic for several years. But as the global recovery has matured and possibly stalled, the size of current account balances – and the accompanying reallocation of aggregate demand – for certain countries has again come under scrutiny (see the discussion by Obstfeld 2018).

Inspection of the data reveals some fascinating patterns. First, as shown in Figure 1 (based on the October 2019 IMF World Economic Outlook projections), the composition of imbalances has changed. Most strikingly, after reaching a local peak in 2015, China’s current account (as a share of world GDP) has continued to shrink, and is projected to continue doing so. In addition, the current account surpluses of oil exporters virtually evaporated.  By 2018, they were essentially nil.

Second, China’s share of the world current account has shrunk, but the aggregate current account balance for advanced Asia (and Japan) has exhibited remarkable durability (Setser 2016). Northern European creditor nations, including Germany, have as a group also exhibited a sustained current account surplus more durable than that of the US. 

Figure 1 Global current balances for select country aggregates

Source: IMF World Economic Outlook, October 2019.

While the dispersion of current account balances has largely reverted back to 2000 levels (Figure 2), we are nonetheless interested in shedding light on the factors driving the current patterns. In a new paper (Chinn and Ito 2019), we estimate the following model based on Chinn and Prasad (2003) as well as, most recently, Chinn et al. (2014), which relates the current account balance to four sets of variables:

  • fiscal variables (budget balance)
  • demographic variables (youth and elderly dependency ratio)
  • financial development variables (credit, institutional development, financial openness)
  • other control variables (growth, initial net international investment position, terms of trade volatility, relative income). 

We estimate this model using non-overlapping five-year panel data for 24 industrial and 138 developing countries between 1972 and 2016 for separate subsamples of industrialised countries, developing countries and emerging market economies, in addition to the full sample.

Figure 2 Distribution of current account balances, as share of national GDP

Source: IMF World Economic Outlook, October 2019. 

The twin deficits versus savings glut versus safe assets hypotheses

Estimation of the baseline model yields a result consistent with the twin deficits hypothesis – a one percentage point increase in the fiscal deficit results in a 0.28 to 0.50 percentage point increase in the current account deficit, depending on the country grouping. These estimates are relatively large compared to the findings in Erceg et al. (2005), Bussière (2010), Corsetti and Muller (2006), and Gruber and Kamin (2007). To some extent, these new findings offset the earlier naysaying about an important role for fiscal policy. 

The savings glut hypothesis is widely interpreted as meaning that the less developed the financial system, the more likely savings are to be redirected externally. The difficulty is in properly measuring financial development, a long-standing challenge in empirical work. The traditional approach of using private credit formation expressed as a share of GDP is easy, but extremely unsatisfying. In order to allow for some nuance in this variable, we interact the quantity measure with other institutional factors, to account for the quality of financial intermediation. Specifically, we enter in a measure of legal development, and capital account openness, along with interaction terms with financial development.

Including these savings glut variables in the estimation model increases the proportion of variation explained by about 10 percentage points. However, unlike in Chinn et al. (2014), we do not find strong evidence for the hypothesis. 

In fact, dropping the 2012-2016 period re-establishes the expected signs for these coefficients. It may suggest either that the 2012-2016 period is beset by such idiosyncratic shocks that the effect of these savings glut variables is obscured, or that the importance of the savings glut effect has faded over time, or both. Different factors may be driving imbalances during the crisis and post-crisis periods.

Nonetheless, this analysis yields a number of other interesting patterns:  

  • The predicted current account balance for the most recent five-year period is not too far off the mark for key ‘countries of interest’ – Japan, and quite interestingly Germany and China. For China, the prediction is almost spot on.
  • While the contributions of budget balances vary over time, the contributions of the savings glut and demography variables tend to be relatively stable. 
  • The contribution of demographic factors tends to be large for industrialised countries but not so for emerging markets. 

The lack of importance of the savings glut variables as proxied in the empirical work does not speak directly to the proposition that demand for safe assets such as US Treasuries has driven at least the US current account balance. Our estimations indicate that the US current account deficit is consistently underpredicted – by around 2 percentage points of GDP, over the past twenty years. It is difficult to further identify this number with, specifically, a safe assets motivation in this aggregate cross-country framework. However, the finding that the own-currency share in world foreign exchange reserves – a proxy variable for reserve currency status – shows up as highly statistically significant in Phillips et al. (2013) is further proof of the importance of the safe asset factor.

Reserve accumulation

To gain greater insight into the determinants of current account balances, we further explore the relevance of the savings glut hypothesis by examining the impact of net official flows. The capital flow from developing economies to industrial countries goes particularly to US Treasuries, in search of safe assets. This capital flow often takes the form of active intervention by developing countries. Hence, we now confront the question of whether intervention matters for current accounts. 

Following Gagnon (2019), we augment the specification with net official flows. Unsurprisingly, this variable shows up as economically and statistically significant. Over the entire sample, a one percentage point increase in intervention is associated with a one third percentage point increase in the current account balance – a big, significantly positive effect. The fact that the significance levels for the savings glut variables drop especially for developing countries and emerging market economies groups signifies that the impact of official flows instead of private flows tends to be captured by the savings glut variables. 

Due to the possible endogeneity of interventions, we instrument the net official flow variable with a dummy for emerging market economies, an interaction term with relative income, exchange rate stability, the share of manufactured goods in total exports, and the five-year lagged net official flows variable (only for the subsample of industrialised countries). 

The estimate on net official flows becomes larger in terms of both magnitude and statistical significance – policymakers do intervene after endogenously reacting to current accounts. The point estimates suggest that for developing countries (emerging market economies), each one percentage point increase in intervention (as a share of GDP) results in a 1.81 (0.96) percentage point increase in the current account. 

The results indicate that for the US, UK, and Germany, official capital inflows contribute negatively to their current account balances. This suggests that these countries are the providers of safe assets.

Among emerging market economies, the contributions of net official flows to current accounts are large. According to our estimates, China’s large surpluses in 2002-06 and 2007-11 are almost solely due to net official flows. Other Asian emerging market economies also have their large surpluses corresponding to active foreign exchange interventions. 

Turning directly to the imbalances of today, among many emerging market economies, intervention is largely reversed during the latest period (2012-16), thus explaining the shrinkage of current account surpluses overall. 

Concluding remarks

Our updated analysis sheds new light on the determinants of global imbalances. The factors which might have been central in the mid-2000s appear to be of lesser importance in recent times, while more prosaic factors – including fiscal policy – have taken on a heightened prominence. To the extent that oil exporters no longer contribute substantially to the surplus side, developments in commodity prices, which were previously determinative, might no longer be. 

The US current account deficit continues to remain substantially underpredicted, even as the model is better able to predict Chinese, Japanese and (the newest bête noire) German current account balances. The US residual is consistent with the view that the US retains the exorbitant privilege of easily financing its current account deficit with the de facto quasi-monopoly on generating safe assets.

This finding highlights the constraints on what can be done. American policymakers are clearly not willing to diminish America’s ability to generate safe assets, nor will other policymakers be able to do so. On the other hand, fiscal policy can (and has had) a noticeable influence on current account imbalances. Hence, arguments that external imbalances are completely immune to such measures can now be readily dispensed with. 


Bussière, M, M Fratzscher and G J Müller (2010), “Productivity shocks, budget deficits and the current account”, Journal of International Money and Finance 29: 1562-1579.

Chinn, M D, B Eichengreen and H Ito (2014), “A forensic analysis of global imbalances”, Oxford Economic Papers 66(2): 465-490.

Chinn, M D and H Ito (2019), “A requiem for ‘blame it on Beijing’: interpreting rotating global current account surpluses”, NBER working paper 26226.

Chinn, M D and E Prasad (2003), “Medium-term determinants of current accounts in industrial and developing countries: An empirical exploration”, Journal of International Economics 59(1): 47-76.

Erceg, C J, L Guerrieri and C Gust (2005), “Expansionary fiscal shocks and the US trade deficit”, International Finance 8: 363-397. 

Gagnon, J (2017), “Do governments drive global trade imbalances?”, Peterson Institute for International Economics working paper 17-15. 

Gruber, J W and S B Kamin (2007), “Explaining the global pattern of current account imbalances”, Journal of International Money and Finance 26: 500-522.

Obstfeld, M (2018), “Twenty-five years of global imbalances”, in Cohen-Setton, J, T Helbling, A Posen and C Rhee (eds), Sustaining economic growth in Asia, Washington, DC: Peterson Institute for International Economics

Phillips, S, L Catão, L Ricci, R Bems, M Das, J Di Giovanni, D Feliz Unsal, M Castillo, J Lee, J Rodriguez and M Vargas (2013), “The external balance assessment (EBA) methodology”, IMF working paper 13/272. 

Setser, B (2016), “The return of the East Asian savings glut”, Council for Foreign Relations discussion paper.

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