The medium-term determinants of the current account: the study of the "savings glut" and the "twin deficits" arguments

Over the last decade, the world economy has been characterized by an alarming escalation of global current account imbalances. The United States and many of other high-income countries have been running huge current account deficits; according to basic accounting principles, these deficits have to be counterbalanced by increasing current account surpluses in other parts of the world. The latter (current account surpluses) are mainly incurred by newly industrialized economies in the East Pacific and rapidly developing oil exporters. The paper investigates the medium-term determinants of the current account based on the sample of 24 countries over the period of 1990-2004. The choice of explanatory variables for the analysis is backed up by the two theories of current account imbalances, namely, the "savings glut" and the "twin deficits "arguments. The results of the regression model show that both above-mentioned theories can be credited for the emergence of global current account imbalances. Moreover, our findings suggest some remedial measures to improve the situation based on the mix of policy tools from both "savings glut" and "twin deficit" perspectives