1. 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

2. Anticipating the Answers Maybe (better investment drought) Maybe

3. 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

4. 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.

5. US Long Term Real Rates Source: St. Louis Fed, Philadelphia Fed

6. World Real Rates Inflation indexed Source: BIS, St. Louis Fed

7. 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_Chinn_Ito.pdf

8. Pooled OLS estimates on 5 year averaged data

9. Is the US Deficit Too Large? Short answer: Barely, according to statistical level Budget deficit is important Model Specifications Estimated Coefficient w/ five-year average data (0) Pooled OLS0.160* (1) Fixed Effects0.377*** (2) 2SLS – IV w/out institutional vars0.325** (3) 2SLS – IV w/ institutional vars0.448* w/ HP-filtered annual data (4) HP – OLS w/out institutional vars0.125*** (5) HP – OLS w/ institutional vars0.095** (6) HP – Fixed Effects0.485*** (7) HP – GLS w/out inst. vars0.375*** (8) HP – GLS w/ inst. vars0.326***

10. US In-Sample Fit

11. 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.

12. Is the E.Asia Surplus Too Large?

16. How Can Low Rates and Imbalances Be Reconciled? NS EAsia NS US NS US ’ I EAsia I US R US R EAsia R0R0 R1R1 CA 1 EAsia > 0CA 1 US < 0

17. Can Financial Development Rescue the US ? Asian Emerging market countries KAOPEN [0, 4.38] Low 10 percentile (0.66) Mean (1.90) High 10 percentile (3.96) LEGAL [0, 6.51] Low 10 percentile (1.66) 0.5280.5030.462 Mean (2.96) 0.0580.033-0.008 High 10 percentile (4.50) -0.523-0.548-0.589

18. Where Does E. Asia Stand? 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 Mean (2.93) China India, Korea, Malaysia, Thailand, ex-China EA High 10 percentile (4.50) Hong Kong, Singapore

19. 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