Do Differences in Financial Development Explain the Global Pattern of Current Account Imbalances?

Building on the panel‐regression approach of Chinn and Prasad (2003) and Gruber and Kamin (2007), we assess whether differences in financial development can explain the large developing‐country surpluses or large US deficits. We find little evidence to support these hypotheses. We also assess whether differences in asset returns, an alternative measure of the attractiveness of financial assets, can explain the international pattern of capital flows. Lower bond yields have been generally associated with larger current account deficits in industrial countries. However, US bond yields have not been significantly lower than those in other industrial economies, suggesting that US financial assets have not been unusually attractive. We consider an alternative hypothesis that spending in the United States was uniquely responsive to lower costs of capital. However, we found this hypothesis also to be weak, as household saving rates have declined throughout the industrial economies.