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This paper studies the global imbalances that occurred in the first years of the twenty-first century. The analysis encompasses the two biggest countries in the world: the U.S.A. and China. Many authors defend the assertion that the relationship between the current accounts of these two countries was one important cause of the subprime crisis. While the U.S.A. has increased its deficit in the last decade, China has improved its surplus. To investigate this relationship, this study performed exogeneity tests. Moreover, it conducted Granger causality tests following the approach of Toda–Yamamoto (1995). The results showed that there is a real causal relationship between the American and the Chinese external balance. Furthermore, the global imbalance between these two countries contributed to the subprime crisis, because the tests detected structural breaks for the external balances of America and China in 2008. The dynamics of the Chinese external balance changed after the subprime crisis

Exogeneity tests for the Chinese and U.S. external balance: Empirical evidence of the connection and the subprime crisis