Uk Balance of Payment Trends

Q.3. Use theory and empirical evidence to evaluate what explains the swings in the current account balance over time.

Introduction

The large and persistent shifts in the current-account balance of industrial and developing countries (DCs) in the first half of the nineties, as well as the balance-of-payments turbulence affecting emerging markets in the mid- and late nineties, have prompted renewed interest in the dynamics of the swings of current account balance(Selen Sarisoy-Guerin,2005). As they noted, the swings in current-account balances are correlated with real depreciations in all economies-developed, developing and transitional but further analysis also shows that the effect of exchange-rate shocks as a factor or cause is stronger in the developed economies.

Evaluation of current account balance swings over time

The growing literature on swings of current account balance on the global perspective has produced various strands on the causes (Mendoza, Quadrini and Ríos-Rull 2009). One prominent school believes that the swings result from economic policy misalignments (Blanchard, Giavazzi and Sa 2005; Obstfeld and Rogoff 2005; Roubini and Setser 2005). Other approaches argue that the swings are caused by events such as differentials in productivity growth (Backus, Henriksen, Lambert and Telmer 2005; Caballero, Farhi and Gourinchas 2008; Engel and Rogers 2006; McGrattan and Prescott 2008), or business cycle volatility (Croke, Kamin and Leduc 2005; Fogli and Perri 2006), demographic dynamics (Attanasio, Kitao and Violante 2006; Henriksen 2005), a “global savings glut” (Bernanke 2005), and the valuation effects (Cavallo and Tille 2006; Ghironi, Lee and Rebucci 2007; Gourinchas and Rey 2007; Hausmann and Sturzenegger 2006). Depending on their perceptions of the source of is wings, three main positions have emerged in the literature on the adjustment (Little and Lafrance 2006). The optimistic view regards the global swings in current accounts balance as an...