Abstract
This paper uses principal components analysis to describe the evolution of current account imbalances in a sample of 18 Organization for Economic Cooperation and Development countries from 1950 to 2020. The analysis shows, using only statistical methods, how two groups of countries formed in the 1980s. There is the current account surplus group including countries in Northern Europe, Japan and Switzerland and then the deficit group including the United States, the United Kingdom, Australia and several countries in Southern Europe. The divergence cannot be attributed to divergence in fiscal and monetary policy. Instead, there is some support for the thesis of Robert Aliber set out in another paper in this issue that capital flows between countries affect exchange rates, asset prices and the current account. The paper builds on two earlier papers in this journal by the same author, one showing how countries that have experienced a financial crisis tend to subsequently develop current account surpluses and the other showing how surpluses and deficits caused by capital flows affect the domestic real economy.
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Notes
According to the OECD (Caldera-Sánchez et al., 2017) there were 120 episodes of banking, currency or sovereign debt crises recorded in a sample of advanced and major emerging market economies over the period 1970–2010.
The countries are Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the U.K. and the U.S.
This is what Gudmundsson and Zoega (2014) found. They adjusted current account surpluses and deficits of 57 countries in the period 2005-2009 for the effect of differences in age structure and found that the adjustment increased the surpluses of Germany and Japan, while the surpluses of China and other Asian surplus countries were significantly diminished. Others have used the purported relationship to explain certain episodes in economic history. For example, Taylor and Williamson (1994) explained the capital flow from Britain to Australia, Canada, the U.S. and Argentina in the late nineteenth century and early twentieth century by high youth dependency ratios in these countries. The old age dependency ratio may matter less if the old continue to save (e.g., Jensen et al., 2022).
Online Supplemental Appendix Table 1 shows private saving, public saving, investment and the current account for Iceland and the European countries that suffered a crisis. These countries are Ireland, Portugal, Spain, Greece and the three Baltic countries of Estonia, Latvia and Lithuania. The pattern of saving and investment that developed after the turn of the century differed somewhat between these countries. In Iceland, there was an investment boom, but domestic saving remained more or less constant, masking falling private saving and increasing public saving. In the Baltics and in Ireland and Spain, it was investment that increased. In Greece and Portugal, it was government spending that was financed through borrowing (Zoega, 2019).
McCauley (2018) attributes the capital flow from Europe to the U.S. as European banks expanding their balance sheets, instead of there being excess savings in Europe.
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Zoega, G. Current Account Imbalances after Bretton Woods. Atl Econ J 51, 27–37 (2023). https://doi.org/10.1007/s11293-023-09760-1
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DOI: https://doi.org/10.1007/s11293-023-09760-1