Current account balance and dollar standard: Exploring the linkages

• Besides private capital flows, current account balances are determined by official flows.
• Increases in central banks' foreign exchange reserves raise the current account balance of reserve-accumulating countries.
• Global reserve accumulation lowers the current account balance of the US.
• Any dollar of provided official reserve assets decreases the US current account balance by more than one dollar.
• Global imbalances can partly be explained by the global demand for reserves.

This paper examines whether the international role of the dollar as main global reserve currency has contributed to persistent current account imbalances. To this end, we analyse how central banks' accumulation of reserve assets affects the current account balance of both reserve-accumulating and reserve-providing countries.Based on a simple portfolio balance model we show theoretically that the global demand for reserve assets by central banks may lower the current account balance of the reserve-issuing country. Our panel data analysis over the period 1970–2009 confirms this hypothesis: Any dollar of provided reserve assets decreases the US current account by more than one dollar. On average, the demand for dollar reserves has lowered the US current account by 1–2 percentage points relative to GDP. The flip side of this effect is a higher current account balance in reserve-accumulating countries. These novel findings show that the worldwide demand for international reserves has contributed to the buildup of global imbalances.