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    Bank of Finland, Rauhankatu 19 B, Helsinki 

Frank Westermann (Osnabrück University): A Tale of Two Surplus Countries: China and Germany

Co-authors: Yin-Wong Cheung (City of University of Hong Kong), Sven Steinkamp (Osnabrück University)

We analyze current account imbalances through the lens of the two largest surplus countries; China and Germany. We observe two striking patterns visible since the 2007/8Global Financial Crisis. First, while China has been gradually reducing its current account surplus, Germany’s surplus has continued to increase throughout and after the crisis. Second, for these two countries, there is a remarkable reversal in the patterns of exchange rate misalignment: China’s currency has turned from being undervalued to overvalued, Germany’s currency has erased its level of overvaluation and become undervalued recently. The evolution of the two countries’ current account balances seems reflective of their misalignment patterns. Our empirical analyses show that the current account balances of these two countries are quite well explained by currency misalignment, some common economic factors, and a few country-specific factors.

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