Abstract
As non-financial corporate sector savings tend to increase globally, its effect on the current account balance assumes particular significance for macrofinancial stability. This study investigates the relationship between current account balance and (non-financial) corporate savings for a panel of developed and developing countries. Using a system GMM model, we find that average current account increases by 0.32% when non-financial corporate savings increase by 1%. Our results are robust to controlling for household sector and government net savings. While the nature of relationship varies across developed versus developing economies, we find that outward flow of FDI and net investment income are plausible channels through which the non-financial corporate savings impact a country’s current account, where corporate savings are affected more by their own income effect compared to a relative price effect. A country’s demographic characteristics and currency strength are important determinants driving this relationship.
Purna Banerjee and Sonalika Sinha are both Manager (Research) in International Department, Reserve Bank of India (RBI). Contact information for Banerjee: purnabanerjee@rbi.org.in and Sinha: sonalikasinha@rbi.org.in. We thank Anushree Parekh for excellent research assistance. We are grateful to Rajib Das and Naoyuki Yoshino for helpful comments. The views expressed in the paper are those of the authors and not the institution to which they belong. The usual disclaimer applies. Errors are purely our own.
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Notes
- 1.
These include the twin deficit hypothesis suggesting that government deficits drive current account deficit (Bluedorn & Leigh, 2011; Kumhof & Laxton, 2013); the savings glut hypothesis which suggests that high savings particularly in emerging markets are resulting in their current account deficits (Chinn & Ito, 2007); the demographic hypothesis which asserts that population structure and life-cycle savings dynamics have contributed to current account imbalances (Dao & Jones, 2018); the financial development argument which argues that countries with deeper financial markets attract foreign saving flows resulting in current account deficits (Caballero et al., 2008); or the income distribution hypothesis that argues that rising inequality has resulted in either aggregate demand deficiency and current account surpluses or debt-financed consumption and current account deficits in different countries (Behringer & Van Treeck, 2018).
- 2.
Excess of saving over investment among corporations in many leading economies.
- 3.
Economies are classified using the UN classifcation which may be found at https://www.un.org/en/development/desa/policy/wesp/wespcurrent/2014wespcountryclassification.pdf (last accessed on 9th April, 2021. The countries in our analysis are as follows: Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, India, Ireland, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Russian Federation, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States.
- 4.
IMF (2017) also noted some that corporate savings behaviour varied across countries with current account surpluses vis-a-vis those with current account deficits.
- 5.
These variables are defined as per the Balance of Payment and International Investment Position Manual (BPM6) provided by the IMF.
- 6.
Since China is not a part of our study sample, our dummy for hard currency does not include the Chinese renminbi.
- 7.
As we observed in Table 3, the triple interaction of corporate savings and current account with development dummy did not yield any significant result, while the own effect of development dummy is significant in Table 2. This points to the need for country-specific analysis at a disaggregated level. We plan this in our future work.
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Banerjee, P., Sinha, S. (2022). Current Account Balances and Non-financial Corporate Savings—A Cross-Country Perspective. In: Yoshino, N., Paramanik, R.N., Kumar, A.S. (eds) Studies in International Economics and Finance. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-16-7062-6_19
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