CIAO DATE: 11/2014
October 2014
Peterson Institute for International Economics
The authors use a cross-country panel framework to analyze the effect of net official flows (chiefly foreign exchange intervention) on current accounts. They find that net official flows have a large but plausible effect on current account balances. The estimated effects are larger with instrumental variables (42 cents to the dollar on average compared with 24 without instruments), reflecting a possible downward bias in regressions without instruments owing to an endogenous response of net official flows to private financial flows. Impacts of net official flows are larger when international capital flows are restricted and impacts are smaller when capital is highly mobile. A further result is that there is an important positive effect of lagged net official flows on current accounts that operates through the portfolio balance channel.
Resource link: Official Financial Flows, Capital Mobility, and Global Imbalances [PDF] - 474K