On Current Account Surpluses and the Correction of Global Imbalances

Abstract

In this paper I analyze the nature of external adjustments in current account surplus countries.I ask whether a realignment of world growth rates --with Japan and Europe growing faster, and the U.S. growing more slowly --is likely to solve the current situation of global imbalances.The main findings may be summarized as follows: (a) There is an important asymmetry between current account deficits and surpluses.(b) Large surpluses exhibit little persistence through time.(c) Large and abrupt reductions in surpluses are a rare phenomenon.(d) A decline in GDP 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 GDP.Taken together, these results indicate that a realignment of global growth --with Japan and the Euro Zone growing faster, and the U.S. 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.

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