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Patterns of Current Account Adjustment – Insights from Past Experience

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  • Bernardina Algieri
  • Thierry Bracke
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    Abstract

    The paper examines episodes of current account adjustment in individual economies. A central finding is that these episodes are very divergent and can be usefully classified, on the basis of cluster analysis, in three groups. A majority of cases is characterised by internal adjustment, exhibiting slowing domestic demand growth. In some cases, the adjustment was mainly external, facilitated by an exchange rate depreciation but without economic slowdown. Finally, some cases involved a crisis-like combination of a severe slowdown and a significant currency depreciation. Using a multinomial logit, we find that this classification of episodes helps improve the predictability of current account adjustment.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-06/cesifo1_wp2029.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2029.

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    Date of creation: 2007
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    Handle: RePEc:ces:ceswps:_2029

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    Related research

    Keywords: external imbalances; current account adjustment; cluster analysis; multinomial logit;

    References

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    1. Aleksander Aristovnik, 2005. "Current Account Reversals In Selected Transition Countries," International Finance, EconWPA 0510021, EconWPA.
    2. Fratzscher, Marcel & Matthieu Bussiere, 2003. "Towards A New Early Warning System of Financial Crises," Royal Economic Society Annual Conference 2003, Royal Economic Society 81, Royal Economic Society.
    3. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series, European Central Bank 0364, European Central Bank.
    4. Maurice Obstfeld & Kenneth Rogoff & Richard Clarida, . "The Unsustainable US Current Account Position Revisited," Working Paper 14901, Harvard University OpenScholar.
    5. Barry Eichengreen & Muge Adalet, 2005. "Current Account Reversals: Always a Problem?," NBER Working Papers 11634, National Bureau of Economic Research, Inc.
    6. Kenza Benhima & Olena Havrylchyk, 2006. "Current Account Reversals and Long Term Imbalances: Application to the Central and Eastern European Countries," Working Papers 2006-27, CEPII research center.
    7. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejia, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," NBER Working Papers 10520, National Bureau of Economic Research, Inc.
    8. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
    9. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series, European Central Bank 0732, European Central Bank.
    10. Sebastian Edwards, 2007. "Capital Controls, Sudden Stops, and Current Account Reversals," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 73-120 National Bureau of Economic Research, Inc.
    11. Sebastian Edwards, 2002. "Does the Current Account Matter?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 21-76 National Bureau of Economic Research, Inc.
    12. Gian Maria Milesi-Ferrett & Assaf Razin, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Working Papers 6620, National Bureau of Economic Research, Inc.
    13. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
    14. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2005. "Financial market developments and economic activity during current account adjustments in industrial economies," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 827, Board of Governors of the Federal Reserve System (U.S.).
    15. Small, Kenneth A & Hsiao, Cheng, 1985. "Multinomial Logit Specification Tests," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 619-27, October.
    16. Calvo, Guillermo & Talvi, Ernesto, 2006. "The resolution of global imbalances: Soft landing in the North, sudden stop in emerging markets?," Journal of Policy Modeling, Elsevier, Elsevier, vol. 28(6), pages 605-613, September.
    17. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
    18. Matteo Bugamelli & Francesco Paterno, 2006. "Do workers' remittances reduce the probability of current account reversals?," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19872, London School of Economics and Political Science, LSE Library.
    19. Richard H. Clarida & Manuela Goretti & Mark P. Taylor, 2007. "Are There Thresholds of Current Account Adjustment in the G7?," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 169-204 National Bureau of Economic Research, Inc.
    20. Guy Debelle & Gabriele Galati, 2007. "Current Account Adjustment and Capital Flows," Review of International Economics, Wiley Blackwell, vol. 15(5), pages 989-1013, November.
    21. Rogoff, Kenneth, 2006. "Global imbalances and exchange rate adjustment," Journal of Policy Modeling, Elsevier, Elsevier, vol. 28(6), pages 695-699, September.
    22. Aleksander Aristovnik, 2006. "Current Account Reversals and Persistency in Transition Regions," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, Faculty of Economics and Business, University of Zagreb, vol. 9(1), pages 1-43, May.
    23. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc.
    24. Freund, Caroline, 2005. "Current account adjustment in industrial countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(8), pages 1278-1298, December.
    25. J. Scott Long & Jeremy Freese, 2006. "Regression Models for Categorical Dependent Variables using Stata, 2nd Edition," Stata Press books, StataCorp LP, edition 2, number long2, March.
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    28. repec:rus:hseeco:181565 is not listed on IDEAS
    29. Komarek, Lubos & Melecky, Martin, 2005. "Currency Crises, Current Account Reversals and Growth : The Compounded Effect for Emerging Markets," The Warwick Economics Research Paper Series (TWERPS) 735, University of Warwick, Department of Economics.
    30. Caroline L. Freund, 2000. "Current account adjustment in industrialized countries," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 692, Board of Governors of the Federal Reserve System (U.S.).
    31. Gian Maria Milesi-Ferrett & Assaf Razin, 1997. "Sharp Reductions in Current Account Deficits: An Empirical Analyis," NBER Working Papers 6310, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Maria Bas & Ivan Ledezma, 2007. "Market Access and the Evolution of within Plant Productivity in Chile," CESifo Working Paper Series 2077, CESifo Group Munich.
    2. Hickey, Ronan, 2007. "How Sustainable are Global Imbalances?," Quarterly Bulletin Articles, Central Bank of Ireland, pages 85-119, October.
    3. Theofilakou, Nancy & Stournaras, Yannis, 2012. "Current account adjustments in OECD countries revisited: The role of the fiscal stance," Journal of Policy Modeling, Elsevier, Elsevier, vol. 34(5), pages 719-734.

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