1. Global imbalances (GI) - the coexistence of large current account surpluses and deficits ？ are often implicated as an underlying cause of the Global Financial Crisis of 2007-08, which was followed by a global economic downturn and the euro area crisis.

2. Numerous studies have been made to uncover the causes of the GI. Prominent hypotheses among the existing studies include (i) the twin deficits hypothesis linking the government budget balance to the current account, (ii) the global saving glut hypothesis, (iii) real macroeconomic factors such as demography and productivity growth differentials as drivers of saving or investment behaviors, (iv) financial under-development in emerging market economies leading to the shortage of high-quality safe assets, and (v) recurrent currency crises and a surge in demand for international reserves among emerging market economies.

3. We first show that existing studies have looked at the partial aspects of the current account. For a better understanding of the issue of GI, it is important to remember the following relationships among the macroeconomic quantities. (a) The current account balances of all countries add up to zero. (b) For each country, the current account balance is made up of national saving (= private saving minus budget deficit) less domestic investment. (c) For each country, the current account equals the accumulation of internal reserves at the central bank plus net private capital outflows. Thus, the current account deficit of, say, the United States equals (i) its own saving shortage, or (ii) the rest of world’s (ROW) saving surplus, or (iii) ROW’s accumulation of internal reserves at the central bank plus net private capital outflows.

4. The purpose of this paper is to address the interaction of these various factors in the determination of the current account balance in a large group of countries. We first estimate a dynamic factor model that decomposes the observed variation in the current account into a common global factor, a regional factor (developed or emerging) and an idiosyncratic country-specific factor. In our model, the current account is decomposed into three factors: global, regional, and idiosyncratic country-specific factor. (The rest of the world is decomposed into global and regional.) We consider two regions: advanced economies and emerging market economies. The sample includes 20 countries in total: the U.S. and its major trading partners. The group of countries accounts for around 80 percent of U.S. total trade.