New perspectives on the rise and fall of global imbalances: evidence from large emerging market economies

This paper estimates the impact of internal factors, such as governance institutions and financial development, versus external, such as capital flows uncertainty, on the excess savings of large emerging market economies (EMEs), identified as a major factor behind their trade surpluses. Using instrumental variables regression to control for endogeneity from institutions, we study eight major EMEs over 1995-2018 as well as a larger panel including both AEs and EMEs over 2001-2018 for robustness. Baseline estimates show that, along with financial development, democratic accountability and judiciary influence CA surpluses in both EMEs and AEs. Anti-corruption measures and government stability are influential specifically in AEs and EMEs respectively. For both EMEs and AEs, surpluses decrease with greater dependence on primary commodity exports supporting the "resource curse" thesis. That EME surpluses move negatively with better institutions and positively with capital flows uncertainty supports the precautionary motive. Sources of EME surpluses changed substantially from the pre- to the post-GFC years. During 2001-2008, higher growth, initial wealth, uncertainty in net capital flows increased surpluses. After 2008, reduced growth, lower CB intervention and better institutions rebalanced surpluses, particularly for Asia-Pacific nations.