RDP 2007-11: Global Imbalances and the Global Saving Glut – A Panel Data Assessment 1. Introduction

The late 1990s were a period of substantial change in the current account positions of the major economies worldwide. The most noticeable development was the widening in the current account deficit of the United States from less than 2 per cent of GDP in 1997 to around 6½ per cent of GDP in 2006. The funding for the increased deficit has come largely from developing nations.

This paper, using a panel of 34 countries over the period 1991–2005, aims to examine what may have contributed to movements in the current account balances of both borrowing and lending nations. In particular, we aim to evaluate some of the explanations for the current pattern of international capital flows, particularly the global saving glut hypothesis due to Bernanke (2005). Consequently, in addition to the more traditional explanatory variables – such as the terms of trade, the fiscal balance and those related to demographic and growth prospects – we also examine variables motivated by the global saving glut hypothesis, such as whether a financial crisis has occurred and measures of differences in the quality of institutions across countries. In contrast to previous studies we use higher-frequency data in an attempt to better capture the effects of financial crises on the current account.

Overall, we find some support for the global saving glut hypothesis; in particular, there appears to be a significant role for financial crises and institutional factors in determining the current account. However, we find that these factors cannot explain some of the trends evident in international capital flows.