Andrea Finicelli of the Bank of Italy will describe a new proposed methodology to estimate the determinants of current account balances, containing also some empirical results in terms of excessive surplus/deficits of a set of large countries, including Japan.
Economic fundamentals affect the current account only if they deviate from their world average. The authors argue that such means should be country-specific, accounting for the dimension of each country's own tradeables sector and weighting the other economies on the basis of bilateral trade. They provide new panel estimates of current accounts for a sample of 53 countries, focusing on the effect of the fiscal balance: they find that a 1 percentage point increase in the fiscal balance-to-GDP ratio raises the current account balance-to-GDP ratio by 0.4 percentage points on average, more than previous estimates. According to their model-based predictions (benchmarks) using the most recent IMF projections, in the medium term the current account surpluses in China and Japan are expected to exceed the equilibrium substantially. The projected current accounts in the United States and, within the euro area, Germany, France and Italy, appear consistent with fundamentals.
The objective is to disseminate information about new analytical approaches to identifying current account imbalances.
Policymakers, academics and the general public.
Bank of Italy