The Impact Of Economic Growth On The Current Account And Its Transmission Path

It has been almost 7 years since the 2008 global financial and economic crisis,but the world economy is still under the pressure of deep adjustment,faced with intertwined risks.Most economies still see growth as the primary task,considering the declining potential growth of the global economy.The slowdown in trade growth is even more obvious,and the global economic imbalances have not been fundamentally resolved.Many emerging market economies have been benefit from growing exports when the economy is prosperous,but now the trade is also adversely affected by the continuous weakness of the economy.This paper attempts to explore the impact and the transmission path of economic growth on the current account based on the two-country open economy model,find the similarities and differences of the impact in different countries,and clarify the transmission path in China.First,the paper reviewed the theories and literature about the relationship of economic growth and current account.The theory has gone through a process from static to dynamic,but most papers are still based on small open economy model,which is defined as a economy where countries will not affect each other.But in an open economic environment,any change in a large country will affect other counties or even the international community.So a research based on a “two-country open economy model” is necessary.Then the paper introduced the economic development and the trade of both China and the world.It is observed that the countries with fast growth rate kept a current account surplus,while the medium-growing countries had maintained deficit in last decade.Based on an extended OLG model,the paper built a “two-country open economy model”,deduced the theoretical relationship between economic growth and the current account,and summarized three main paths: consumption path,exchange path and capital flow path.In the following empirical section,the paper selected the annual economic data from 2000 to 2014 of 44 industrialized countries and 60non-industrialized countries to find the impact of economic growth on the current account through a system-GMM two-step method,and built a five-variable VAR on Chinese data to analyze the transmission path from economic growth to the current account through the exchange rate and foreign capital inflow.Through the model,the paper got the conclusion as follow: In the open equilibriumstate,the country whose economy grows faster in the “two-country model” has a higher proportion of current account,that is,if a country’s economic growth is faster than the rest of the world,then its current account tends to be improved.Through the path analysis,this paper argues that economic fluctuation will affect the consumer psychology and thus influence the current account,while the role of exchange rate and capital flow in the impact of economic growth on the current account is different for countries in different stages of development.The empirical results of the system-GMM show that both the current and previous economic growth have a significant negative impact on the current account,but the non-industrialized country’s current economic growth rate has a 0.011 impact on the current account while the industrialized country’s coefficient of influence is-0.329,which is in the opposite direction.So we think that economic growth will lead a positive role with the accumulation of net savings when the country is in the rapid development,and the positive impact will be weaken or even turn to negative because of the improved financial system after the economic growth gets more steady.In addition,with a more volatile economic growth,the current account trends to be improved,for the prudent consumer psychology and precautionary savings.Finally,the impulse response model under the VAR model shows that China’s economic growth has a positive impact on the current account in short time,whether through the exchange rate path or capital inflow path.The empirical results and theoretical analysis show that financial development and capital inflow play an important role in the impact of economy growth on current account.Therefore,the following measures should be taken in view of the big current account surplus of China in the global economic downturn: First,foreign capital should be used in reason,and the trade transformation must be sped up;Second,domestic demand should be expanded,and financial development be promoted;Finally,international cooperation is essential to getting rid of the doldrums.