Current account and international networks

• Published date: 01 November 2020
• DOI: http://doi.org/10.1111/roie.12493
• Date: 01 November 2020
• Author: Daryna Grechyna

Rev Int Econ. 2020;28:1269–1294. wileyonlinelibrary.com/journal/roie

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© 2020 John Wiley & Sons Ltd

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INTRODUCTION

The world economy has become remarkably interconnected. Recent waves of trade liberalization,

financial deregulation, and technological advances have facilitated growth in international flows of

goods, services, and financial assets. The expansion of intercountry trading have contributed to grow-

ing current account imbalances (see Caballero, Farhi, & Gourinchas, 2008). In the scope of increasing

globalization, international trade and financial networks have emerged as important drivers of several

global economic phenomena including financial contagions and systemic risk spread (see, e.g., Gai

& Kapadia, 2010 and Kali & Reyes, 2010). The question arises whether a country’s position in these

international networks has any impact on its current account, above and beyond the traditional mea-

sures of trade openness and financial development. This question is of significant policy importance:

given recent concerns about the tendencies of growing gross international flows and current account

Received: 11 December 2019

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Revised: 24 May 2020

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Accepted: 5 June 2020

DOI: 10.1111/roie.12493

ORIGINAL ARTICLE

Current account and international networks

DarynaGrechyna

Facultad de Ciencias Económicas y Empresariales, Departamento de Teoría e Historia Económica, University of Granada,

Granada, Spain

Correspondence

Daryna Grechyna, Facultad de

Ciencias Económicas y Empresariales,

Departamento de Teoría e Historia

Económica, University of Granada,

Campus Universitario de Cartuja P.C

18071, Granada, Spain.

Email: dgrechna@gmail.com

Abstract

This paper explores the impact of international trade and

financial networks on the current account balances. The

network centrality measures are computed based on the

structure and volume of trade and financial flows among the

countries. A more central position in the international trade

network improves the current account balance in developed

countries but has no impact on the current account in devel-

oping countries. A more central position in the international

financial network improves the current account balance in

developed and developing countries. Besides, the impact of

the international financial network on the current account

has become stronger over time.

JEL CLASSIFICATION

F32; F41; F42

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GRECHYNA

imbalances, an understanding of the international connections’ role in these processes could facilitate

the elaboration of policies aimed at improving global financial stability.

The purpose of this paper is to investigate the relationship between a country’s position in the inter-

national trade and financial networks and its current account balance. The international trade network

(ITN) is represented by the structure of intercountry trading links and volumes of bilateral export and

import flows. The international financial network (IFN) is represented by the structure of intercountry

foreign investment links and volumes of bilateral flows of financial assets. The international trade

and financial networks capture the indirect effects of trade openness and financial openness. A coun-

try which is more central in the international network is connected to many countries or other more

central countries; or has large exports, imports, or financial flows; or serves as a bridge between the

other countries’ trade. Such a country can potentially better diversify risks from foreign and domestic

activities by manipulating its international trade or financial flows because it has some market power

(see Aller, Ductor, & Herrerias, 2015). At the same time, a country which is more central in the inter-

national network can have high exposure to trade or financial shocks from the trading partners, that is,

it can suffer from the international networks’ congestion externalities (Aller etal., 2015). Therefore,

the impact of a country’s network centrality on its current account is ambiguous in general. Besides,

the impact of international networks on the current account can differ along a country’s development

path and across countries over time.

I use panel data for a large sample of developed and developing countries to evaluate the role of ITN

and IFN position on the current account across countries and over time, for developed and developing

country groups. I use three indicators of a country’s importance in the international network: A country’s

closeness centrality that measures how easy a country can reach other countries; betweenness centrality

that measures how important a country is in connecting the other countries; and eigenvector centrality

that measures how influential a country’s neighbors are (Jackson, 2010). I apply several econometric

specifications used in the literature on the current account determinants (in particular, Behringer & van

Treeck, 2018; Phillips etal., 2014). First, I use the pooled GLS estimator with time fixed effects to eval-

uate the relationship between the position (centrality) in the international network and current account,

distinguishing between developed and developing countries. Second, I control for country and time fixed

effects in order to remove the country-specific fixed factors. Finally, I instrument the network variables

as well as the fiscal balance by their lagged values and by the population growth of a country’s trading

partners’ partners (following Aller etal., 2015; Bramoulle, Djebbari, & Fortin, 2009).

The results suggest that, once the country-specific fixed factors are controlled for, a more central

position in the international trade network improves the current account in developed countries but has

an insignificant impact on the current account in developing countries. A more central position in the

international financial network improves the current account balance regardless of a country’s stage

of development. Besides, I find some evidence that the impact of the international financial network

centrality of a country on its current account balance increased over time while the impact of interna-

tional trade network centralities remained relatively constant during the last two decades. Finally, the

estimates from the baseline model suggest that higher centrality in the international networks helped

improve the current account balances during the financial crisis of 2007–2008. The policy implica-

tions from this study indicate that financial liberalization that facilitates the growth of investment links

and financial flows across developed and developing countries could improve the current account

balances in the global economy.

This paper contributes to the literature on the current account determinants (see, e.g., Behringer

& van Treeck, 2018; Chinn & Ito, 2007; Chinn & Prasad, 2003; Chinn, Eichengreen, & Ito, 2013;

Gruber & Kamin, 2007, 2009; Phillips etal., 2014) and on the role of international networks in the

macroeconomy. While trade openness and financial development have been identified as important