East Asia and Global Imbalances

Hiro Ito and Menzie Chinn

in Financial Sector Development in the Pacific Rim

Published by University of Chicago Press

Published in print April 2009 | ISBN: 9780226386843
Published online February 2013 | e-ISBN: 9780226386867 | DOI:
East Asia and Global Imbalances

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This chapter takes a closer look at the effect of financial development on current account balances and the saving-investment determination. It examines the effect of different types of financial development—whether banking, equity, bond, or insurance-market sector—as well as the various dimensions of financial development, such as size, degree of activity, and efficiency. The results confirm a role for budget balances in industrialized countries (IDCs) when bond markets are incorporated. Second, empirically, both credit to the private sector and stock market capitalization appear to be equally important determinants of current account behavior. Third, while increases in the size of financial markets induce a decline in the current account balance in IDCs, the reverse is more often the case for developing countries, especially when other measures of financial development are included. Fourth, a greater degree of financial openness is typically associated with a smaller current account balance in developing countries.

Keywords: financial development; current account balance; budget balance; industrialized countries; bond markets; stock market capitalization; financial markets; developing countries

Chapter.  16348 words.  Illustrated.

Subjects: Business and Management

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