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External adjustment and the global crisis

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  • Lane, Philip R.
  • Milesi-Ferretti, Gian Maria

Abstract

The period preceding the global financial crisis was characterized by a substantial widening of current account imbalances across the world. Since the onset of the crisis, these imbalances have contracted to a significant extent. In this paper, we analyze the ongoing process of external adjustment in advanced economies and emerging markets. We find that countries whose pre-crisis current account balances were in excess of what could be explained by standard economic fundamentals have experienced the largest contractions in their external balance. We subsequently examine the contributions of real exchange rates, domestic demand and domestic output to the adjustment process (allowing for differences across exchange rate regimes) and find that external adjustment in deficit countries was achieved primarily through demand compression, rather than expenditure switching. Finally, we show that changes in other investment flows were the main channel of financial account adjustment, with official external assistance and ECB liquidity cushioning the exit of private capital flows for some countries.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 88 (2012)
Issue (Month): 2 ()
Pages: 252-265

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Handle: RePEc:eee:inecon:v:88:y:2012:i:2:p:252-265

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Current account; Financial crisis; External adjustment;

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References

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  1. Maurice Obstfeld & Kenneth Rogoff, 2005. "The unsustainable U.S. current account position revisited," Proceedings, Federal Reserve Bank of San Francisco.
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  26. repec:ucp:bknber:9780226454627 is not listed on IDEAS
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Citations

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Cited by:
  1. Martin Berka & Michael B. Devereux, 2013. "Trends in European real exchange rates," Economic Policy, CEPR & CES & MSH, vol. 28(74), pages 193-242, 04.
  2. Blaise Gnimassoun & Valérie Mignon, 2013. "Current-Account Adjustments and Exchange-Rate Misalignments," Working Papers 2013-29, CEPII research center.
  3. Philip Lane & Peter McQuade, 2009. "Domestic Credit Growth and International Capital Flows," The Institute for International Integration Studies Discussion Paper Series iiisdp428, IIIS.
  4. Galstyan, Vahagn & Lane, Philip R., 2013. "Bilateral portfolio dynamics during the global financial crisis," European Economic Review, Elsevier, vol. 57(C), pages 63-74.
  5. Evans, Martin, 2013. "Global Imbalances, Risk, and the Great Recession," MPRA Paper 52363, University Library of Munich, Germany.
  6. Blaise Gnimassoun & Valérie Mignon, 2014. "How macroeconomic imbalances interact? Evidence from a panel VAR analysis," EconomiX Working Papers 2014-5, University of Paris West - Nanterre la Défense, EconomiX.
  7. Issiaka Coulibaly & Blaise Gnimassoun, 2013. "Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?," EconomiX Working Papers 2013-42, University of Paris West - Nanterre la Défense, EconomiX.
  8. Christoph Zwick, 2013. "Current Account Adjustment in the Euro-Zone: Lessons from a Flexible-Price-Model," Graz Economics Papers 2013-08, University of Graz, Department of Economics.
  9. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
  10. Philip R. Lane, 2012. "Financial Globalisation and the Crisis," BIS Working Papers 397, Bank for International Settlements.
  11. Stefan Ederer & Peter Reschenhofer, 2013. "Macroeconomic Imbalances in the EU," WWWforEurope Working Papers series 42, WWWforEurope.
  12. Berger, Helge & Nitsch, Volker, 2012. "Bilateral Imbalances in Europe," Darmstadt Discussion Papers in Economics 58438, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
  13. Hassan, Syeda Anam & Zaman, Khalid, 2012. "Effect of oil prices on trade balance: New insights into the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2125-2143.
  14. Philip R. Lane, 2009. "Cross-Border Financial Integration in Asia and the Macro-Financial Policy Framework," The Institute for International Integration Studies Discussion Paper Series iiisdp423, IIIS.

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