WASHINGTON - The Asian financial crisis of the late 1990s can explain the emergence of large current account surpluses in the region but fails to explain why the United States faces a deficit, a Federal Reserve study found.
Joseph Gruber and Steven Kamin, two researchers at the Fed's Washington-based board, said that although conventional economic models do not explain the burgeoning Asian surpluses, a model altered to account for financial crises did.
"The financial crises in developing Asia in the late 1990s apparently played a key role in promoting surpluses: directly by restraining domestic spending, particularly investment, and, perhaps, indirectly by encouraging the authorities to take measures to keep their exchange rates competitive," they wrote in a paper recently posted on the Fed's website.
But they said the model failed to explain why the US received so much of the capital that had flowed out of Asia, with two factors some analysts point to - strong US economic growth and market-friendly US regulation and investor protections - offering only a partial explanation.
"Our model fails to predict the substantial US current account deficits of recent years and still predicts a small surplus," Kamin and Gruber wrote.
The shortfall in the US current account, a broad measure of trade and investment, has been running at more than 6 per cent of US gross domestic product in recent quarters, a level most economists say is unsustainable over the long haul.
The two Fed researchers walk through several popular explanations for the emergence in recent years of large global trade imbalances: widening US budget deficits, a global savings "glut", a lack of currency flexibility among some US trading partners.
Their research partially supported the notion that a glut of savings in Asia lay behind the imbalances.
They speculated the failure of their model to explain the US current account gap could be due to a failure to fully grasp the interplay between growing budget gaps, strong economic growth and market-friendly institutions, or it could reflect factors not included in the model.
What's wrong
Some reasons for the emergence of large global trade imbalances in recent years include:
* Widening US budget deficits.
* A global savings "glut".
* A lack of currency flexibility.
- REUTERS
US gap puzzles experts
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