Global Current Account Imbalances: The Role of Currency Internationalization

Abstract

This paper explores the role of currency internationalization as the medium-term determinants of global current account imbalances, particularly the U.S. current account deficit. In theory, different processes and degrees of currency internationalization across countries can lead to asymmetric changes in international lending and borrowing (or current account) across countries. The higher degree of currency internationalization a country has, the more access it has to international financial markets. That is, a country with a high degree of currency internationalization is likely to be able to borrow with less cost. Therefore, the country is likely to end up with current account deficits. I adopt a panel regression for 45 countries that includes the standard determinants of the current account imbalance as well as a measure of currency internationalization. I find that 1) the degree of currency internationalization is negatively associated with current account balances and 2) the U.S. current account deficit is well explained by the degree of currency internationalization.