Do Governments Drive Global Trade Imbalances?

This paper examines the extent to which government policies are responsible for the pattern of current account (trade) imbalances and, by implication, the extent to which such policies might be used to achieve the G-20 goal of reducing imbalances. Fiscal balances and foreign exchange intervention are the most important observable factors behind differences in current account balances across countries and over time. This finding is robust to alternative equation specifications, estimation techniques, and sample selections. The empirical results in this paper strongly suggest that G-20 countries (and others) have the necessary tools to achieve their stated goal of narrowing current account imbalances.