Global Imbalances from the Historical Perspective

This paper examines the global imbalances in two eras of globalization. The main focus is on the medium-run factors that determine the current account balances. The results suggest that relatively rich countries with developed financial markets, high quality institutions and high proportion of dependent persons tend to run current account deficits (or lower surpluses) in both periods. On the other hand, the high initial level of net foreign assets increases the current account balance. This holds especially in the prewar period. The government budget balance has a positive effect on the current account balance in some instances. In the prewar period, the government budget balance plays the role only in the short-run, suggesting the importance of the short-run fluctuations in the current account balance. The twin deficits hypothesis plays a more important role in the second era of the globalization. However, it holds only for developing countries. These results suggest that the twin deficit hypothesis and the global savings glut hypothesis are not mutually exclusive.