Does financial openness explain the increase of global imbalances before the crisis of 2008?☆
Introduction
Current account imbalances have grown significantly over the last fifteen years. Several factors have been designated, in the literature, as the main drivers of these imbalances: growth differentials, saving and investment rate differences, exchange rate misalignments and financial openness (i.e. capital account openness).
Since the middle of the 1990s, global imbalances intensify to reach a climax before the financial crisis in 2006–2008. These evolutions can be considered as unsustainable and they have been one of the underlying causes of the financial crisis as noted by Servén and Nguyen (2013).1 In 2006, the main contributors of these imbalances are the United States (with a deficit of more than 1.6% of world GDP), China and Asian countries and the oil exporters׳ countries (with a joint surplus of more than 1.8% of world GDP) as shown in Fig. 1.
Global imbalances are a threat to the global macroeconomic stability (Blanchard and Milesi-Ferretti, 2012). Therefore identifying the main causes and drivers of these imbalances seems to be crucial. We estimate, with panel regression techniques, the impact of capital account openness on medium-term current account imbalances for industrialized and emerging countries by using a de jure measure of financial openness (the Chinn–Ito index of capital account openness, 2002) and a de facto measure of financial openness (the gross foreign assets measured as the sum of foreign assets and foreign liabilities). The main finding is that the relative financial openness (measured relatively to world average) has played a significant role on the magnitude of medium-term current account. By increasing the opportunities of overseas investments, the relative financial openness has had positive impact on medium-term current account balances of industrialized countries (because of downward pressures on domestic investment rates). Conversely, the relative financial openness has had negative impact on medium-term current account balances of emerging countries (because of upward pressures on domestic investment rates).
For a number of industrialized countries, the evolution of the relative financial openness (which has dropped since the middle of the 1980s since they have already liberalized their capital account and that the world average has followed an increasing trend) has had a negative impact on medium-term current account balances. For South-East Asian countries, the evolution of the relative financial openness (which has dropped since the middle of the 1980s since these countries have liberalized their capital account more slowly than the world average) has had a positive impact on medium-term current account balances. This paper is organized as follows. Section 2 presents various approaches which have been proposed to shed light on the development of global imbalances since the mid-1990s. Section 3 provides empirical results of the current account regressions. Section 4 studies in greater details the contributions of each explanatory variable to the medium-term current account. Section 5 concludes.
Section snippets
Most popular explanatory approaches of global imbalances
Various explanations have been proposed to shed light on the surge of global imbalances observed since the middle of the 1990s as noted by Chinn (2013).2 We first review these different explanations and then we discuss the implications for our empirical work.
An empirical test of the role of financial openness
As the current account equals the difference between domestic saving and investment (i.e. the saving–investment balance), the current account developments are examined from the perspective of the medium- to long-term determinants of saving and investment behaviors (Gruber and Kamin, 2007). According to these authors, the main determinants of the current account at medium term are, inter-alia, the demographic characteristics, such as the dependency ratios of dependent populations relative to the
Medium run trends in current account balances
As it has been explained in the previous section, the drop of the RKAOPEN variable has induced an increase of the medium-term deficits in a number of industrialized countries and an increase of the medium-term surpluses of South-East Asia׳s emerging countries. This section illustrates this point by studying some striking cases.
Conclusion
Global imbalances are a threat to the global macroeconomic stability. Therefore identifying the main causes and drivers of these imbalances seems to be crucial. The objective of this paper was to investigate whether financial openness has played a major role in the evolution of global imbalances during the period preceding the crisis of 2008.
The main finding is that the relative financial openness (measured relatively to world average) has played significant role on the magnitude of medium-term
Acknowledgments
The author is grateful to Cécile Couharde and Menzie Chinn for useful comments during the international conference “Intra-European Imbalances, Global Imbalances, International Banking, and International Financial Stability” organized by the DIW Berlin in September 2012. The author is indebted to Gilles de Truchis for fruitful discussions during the third International Symposium in Computational Economics and Finance organized by the INSEEC business school in April 2014. The author is also
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This paper has been presented at the 3rd International Symposium in Computational Economics and Finance (ISCEF) organized in Paris on April, 10–12, 2014 (www.iscef.com) by Hachmi Ben Ameur (INSEEC Business School), Makram Bellalah (University of Jules Verne), and Fredj Jawadi (University of Evry & EconomiX).