Monday, May 3, 2010

Immaculate Transmission Revisited

Over in VoxEU, Song, Storesletten and Zilibotti treat us to yet another explanation for China’s immense current account surplus, and as usual one that assigns the primary role to that country’s net savings. In this case the culprit is a bifurcated credit market that prevents Chinese investors from sinking their funds into the most profitable domestic enterprises. I will spare you the details; the giveaway/throwaway line is this one: “As a consequence, a growing share of domestic savings is invested abroad and this generates a capital account deficit and matching current account surplus.”

And how exactly does it generate the current account surplus? Why does the export of Chinese finance return in the form of net Chinese exports? Earlier in the article they denied that exchange rates have anything to do with it, so what other channel do they propose?

This is based on a forthcoming article in the AER, which means that a few reviewers there must have been asleep at the wheel. Looks like an easy outlet to publish in; I should give it a try.


dodz said...

he he he 1st to comment good luck.. i like your site it speak to economic.

Cirze said...

Thanks for posting this as I'm trying to follow this logic path myself with some difficulty.

May I blogroll you?

Fabulous site (as you well know).


Jimbo said...

Haven't read their article so I suppose I shouldn't comment but China is aggressively investing large amounts of capital in resource extracting enterprises (and associated infrastructure)in places like Africa in order to ship those resources back to China to then manufacture new exports. Massive direct foreign investment in resource extraction abroad may attenuate the pure influence of exchange rate manipulation in the trade accounts.