Is There a

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Is There a Global Saving Glut?And Is It the
Cause of the US Current Account Deficit?

• Menzie D.Chinn
• University of Wisconsin and NBER

Presentation at NABE Panel International Capital
Flows ASSA, Chicago, January 6, 2007
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Anticipating the Answers

• Maybe (better investment drought)
• Maybe

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Too Obvious a Question?

• Long term real rates are low
• The U.S. CA deficit seems anomalously large
• The East Asian surpluses appear anomalously large

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Are Real Long Term Rates and the CA Moving
Together?
Note 10 yr const. mat adjusted by Livingstone,
Blue Chip, SPF 10 year expected infl.
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US Long Term Real Rates
Source St. Louis Fed, Philadelphia Fed
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World Real RatesInflation indexed
Source BIS, St. Louis Fed
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Is the US Deficit Too Large?

• Panel regression approach
• 1971-2004, 21 industrial, 97 developing countries
  (WDI), in five year panels
• Include time fixed effects
• X are macro variables
• Z are financial development, institutional
  variables (credit law order)
• Source M.Chinn H. Ito, Assaying the World
  Saving Glut,http//www.ssc.wisc.edu/mchinn/CA_C
  hinn_Ito.pdf

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Pooled OLS estimates on 5 year averaged data
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Is the US Deficit Too Large?
Model Specifications Estimated Coefficient
w/ five-year average data
(0) Pooled OLS 0.160
(1) Fixed Effects 0.377
(2) 2SLS IV w/out institutional vars 0.325
(3) 2SLS IV w/ institutional vars 0.448
w/ HP-filtered annual data
(4) HP OLS w/out institutional vars 0.125
(5) HP OLS w/ institutional vars 0.095
(6) HP Fixed Effects 0.485
(7) HP GLS w/out inst. vars 0.375
(8) HP GLS w/ inst. vars 0.326

• Short answer Barely, according to statistical
  level
• Budget deficit is important

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US In-Sample Fit
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Reality Check

• Between 2000 and 2005, there was approximately
  a 4.3 percentage point swing in the US Federal
  budget balance, and a 2.2 percentage point swing
  in the U.S. current account balance. This outcome
  is consistent with a 0.5 coefficient.

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Is the E.Asia Surplus Too Large?
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How Can Low Rates and Imbalances Be Reconciled?
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Can Financial Development Rescue the US?
Asian Emerging market countries Asian Emerging market countries KAOPEN 0, 4.38 KAOPEN 0, 4.38 KAOPEN 0, 4.38
Asian Emerging market countries Asian Emerging market countries Low 10 percentile (0.66) Mean (1.90) High 10 percentile (3.96)
LEGAL 0, 6.51 Low 10 percentile (1.66) 0.528 0.503 0.462
LEGAL 0, 6.51 Mean (2.96) 0.058 0.033 -0.008
LEGAL 0, 6.51 High 10 percentile (4.50) -0.523 -0.548 -0.589
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Where Does E. Asia Stand?
KAOPEN KAOPEN KAOPEN
Low 10 percentile (0.66) Mean (1.90) High 10 percentile (3.96)
LEGAL Low 10 percentile (1.66) Bangladesh Indonesia, Philippines, Sri Lanka
LEGAL Mean (2.93) China India, Korea, Malaysia, Thailand, ex-China EA
LEGAL High 10 percentile (4.50) Hong Kong, Singapore
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Ending Thoughts

• Most of the debate has been cast in identities,
  or simple bivariate relationships
• Chinn-Ito quantify the uncertainty surrounding
  the CA balance relationship
• There is something to the saving glut story
• But there is also a role for budget deficits
• Financial development may or may not help reduce
  the saving glut