The WAGE Current Account Sustainability Collaborative theoretically and empirically analyzes the ability of the major economies of the world (“the G-5”) to sustain large current account deficits over prolonged periods.

Principal Investigators:

Menzie Chinn, Professor of Economics and Public Affairs
Charles Engel, Professor of Economics and Finance

Project Overview:

A central economic challenge of the first decade of the third millennium is “global rebalancing” –the re-alignment of current account balances between the three key economic regions of the US, the Euro area, and East Asia. There is a large theoretical literature that explains how current account balances (the trade balance plus net income from assets abroad) should evolve in idealized economies. However, that literature has been largely unsuccessful in empirically explaining real-world experiences.

Interestingly, movements in developing country current account balances have proven to be more amenable to statistical analysis than the corresponding developed country experiences. These differing results may be attributable to the special characteristics of developed economies, including perhaps the ability of the governments to borrow in their own currencies, and the use of their currencies as foreign exchange reserves by central banks around the world.