A Study On How Differences In Financial Development Explain Global Current Account Imbalances

Global current account imbalances have been expanding and increasingly serious since the mid-1990s, which become the main features and the significant risks of the current global economy. That cannot be ignored is the last and profound impact and new potential risks and new challenges which global current account imbalances bring about on national economics. Trade imbalances are always hidden behind the imbalance of international capital flows, although there is no consensus explanation for the current pattern of international capital flows. A sharp increased foreign demand for U.S. financial assets and current account imbalances have kept company in recent years. Meanwhile, with huge savings accumulated by the large surpluses of the Asian developing economies and so on flowing into the United States, international capital flows show an increasingly obvious two-way flow trend, that is direct investment flowing into emerging markets and developing countries from the developed countries, and the financial capital flowing in the opposite direction.The pattern of global current account imbalances, which appears inconsistent with the standard view that mature industrial economies should be exporting capital to developing countries, has received considerable attention in recent years. However, it has been even more difficult to assess all of the proposed factors jointly and compare their separate contributions to the international pattern of current account imbalances. In the context of financial globalization, financial development gaps among the parties which are undergoing current account imbalances cannot be ignores when exploring the causes deeply-seated. Therefore, based on financial development theory and international payments imbalances theory, this dissertation uses detailed data to measure the development of the global financial system firstly. Then by the introduction of risk diversification and financing capabilities differences in the financial sector, this dissertation builds a double heterogeneity agent model in Bewley model compared with standard representative agent neoclassical growth models. Drawing support from DSGE and empirical analysis of the dynamic panel, we find how differences in financial development can explain financial capital and fixed capital flowing in opposite directions which led to the internal mechanism of global current account imbalances.The first problem in this dissertation is how to reflect the development of the global financial gaps reasonably. With the help of Global Development Finance database (GFD) and Doing Business database (DB), we comparative the four aspects of financial depth, financial access, financial efficiency, financial stability in the major developed and developing countries. What's more, we also quantitatively analyze the financial environment, which includes the business environment and policy environment. The results show that there are significant differences in the global financial development and are not also remarkably reduced in recent years while the process of global financial integration has been continuously pushed forward. At the same time, the increasing decline in the degree of financial stability and the importance of securities markets of developed countries have a strong impetus to the inflow of financial capital.Two-way capital flows and high-speed growth of the global economy closely link with current account imbalances which show the trend of centralization of deficit and surplus decentralized. Now, the international division of labor constitutes China, ASEAN and other emerging Asian economies as the main low-end manufacturing industry chain, Japan, Germany and other developed countries as the main high-end manufacturing chain and finance rapid expansion countries, such as the United States, Britain which supply diversified financial products to meet the global huge flows of capital. United States is the concentration of global savings inflows especially.The essence of differences in financial development is market completeness. The more complete financial market of the country, the higher the level of the financial development is. Based on imperfect market theory, this dissertation builds a double heterogeneity agent model by introduction different risks dispersing ability and financing capacity of the financial sector into the Bewley model, in order to explain how differences in financial development caused by incomplete market can affect a country's current account through transnational capital configuration in the process of financial integration. We find that the current account imbalances under Bewley model with open conditions require three conditions. First of all, saving cannot fully meet the realization of the purpose of inter-temporal consumption substitution effect or risk diversification, so households and companies need precautionary savings. Secondly, there are different risk premiums in factor prices, the factor price of capital due to the incompleteness. That is, there is a transnational difference between risk-adjusted factor prices. Thirdly, there is two-way or one-way capital flow, as an alternative to the cross-border movement of products.Both the theoretical model and numerical simulation results in this dissertation show that incomplete financial markets which are subject to overall macroeconomic shocks have a significant impact on household savings and investments in the double heterogeneity agent model. The optimal FDI decisions and investments of a company, the optimal demand for foreign bonds and consumption of a household are significantly dependent on the level of domestic financial development. Differences in financial development notably affect the equilibrium interest rate, consumption, savings structure and capital stock, thereby influencing the current account under open conditions. Because of its lower degree of market completeness, households in the financial underdeveloped countries prefer to hold more strongly precautionary savings motivation generated by self-insurance. In the process of financial integration, risk premium due to market imperfections results in the pattern that the financial savings of the less-developed countries outflow in the form of financial capital investment while savings in developed countries outflow in the form of direct investment. International capital shows a two-way flow which leads to current account imbalances. Differences in financial development strongly influence transnational capital configuration and then have a great impact on global current account imbalances.The empirical study supports the conclusions of the theoretical model very well. Combined with the results of the measure of financial development differences, this dissertation firstly uses the method of principal component factor analysis to filter the best variables to reflect financial developments, and then explore how differences in financial development affect current account imbalances in66countries from1995to2010with the help of the dynamic OLS panel data. The empirical results indicate that differences in financial development significantly affect the current account imbalances, while financial depth has great efforts to explain the current account imbalances. Simultaneously, Not only financial development through the financial net capital inflow channels in developed economies, but also direct investment net capital inflow in emerging markets and developing countries have a significant effect on current account imbalances.Global current account imbalances have increased constantly and accumulated a lot of contradictions and imbalances. Based on differences in financial development perspective to adjust global current account imbalances, the imbalance parties should be gradual transformation of economic growth mode, orderly adjust its model of economic development and solve economic structural problems step by step firstly. Then the financial underdeveloped economies respond to deepen financial reform, improve the quality of financial openness. The last but not the least, to strengthen regional financial supervision and cooperation is also very important to adjust global current account imbalances.