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Patterns of current account adjustment - insights from past experience

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Author Info
Bernardina Algieri () (Department of Economics and Statistics, University of Calabria, I-87036 Arcavacata di Rende, Italy.)
Thierry Bracke () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Abstract

The paper examines over seventy episodes of current account adjustment in industrial and major emerging market economies. It argues that these episodes were characterised by strongly divergent economic developments. To reduce this divergence, the paper classifies episodes with similar characteristics in three groups, using cluster analysis. A majority of cases was characterised by internal adjustment through a slowdown of domestic demand and did not involve significant exchange rate movements. In some cases, the adjustment was mainly external, facilitated by a relatively modest exchange rate depreciation and 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. JEL Classification: F32, C14, C25.

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Paper provided by European Central Bank in its series Working Paper Series with number 762.

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Length: 54 pages
Date of creation: Jun 2007
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Handle: RePEc:ecb:ecbwps:20070762

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Keywords: External imbalances; current account adjustment; cluster analysis; multinomial logit.;

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  2. Sebastian Edwards, 2005. "Capital Controls, Sudden Stops and Current Account Reversals," NBER Working Papers 11170, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Maurice Obstfeld & Kenneth Rogoff, 2005. "The unsustainable U.S. current account position revisited," Proceedings, Federal Reserve Bank of San Francisco, issue Feb. [Downloadable!]
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  4. 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, vol. 26(3), pages 619-27, October. [Downloadable!] (restricted)
  5. Freund, Caroline, 2005. "Current account adjustment in industrial countries," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1278-1298, December. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Muge Adalet & Barry Eichengreen, 2007. "Current Account Reversals: Always a Problem?," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 205-246 National Bureau of Economic Research, Inc. [Downloadable!]
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  8. Richard H. Clarida & Manuela Goretti & Mark P. Taylor, 2006. "Are There Thresholds of Current Account Adjustment in the G7?," NBER Working Papers 12193, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. 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 827, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  12. Ramón Adalid & Carsten Detken, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 732, European Central Bank. [Downloadable!]
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  15. repec:rus:hseeco:181565 is not listed on IDEAS
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  18. 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, vol. 9(1), pages 1-43, May. [Downloadable!] (restricted)
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  21. Diego Valderrama, 2006. "What are the risks to the United States of a current account reversal?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Oct 27. [Downloadable!]
  22. Bugamelli, Matteo & Paterno, Francesco, 2005. "Do workers'remittances reduce the probability of current account reversals ?," Policy Research Working Paper Series 3766, The World Bank. [Downloadable!]
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  23. Gabriele Galati & Guy Debelle, 2005. "Current account adjustment and capital flows," BIS Working Papers 169, Bank for International Settlements. [Downloadable!]
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  24. 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. [Downloadable!]
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  28. Federico Sturzenegger & Pablo Guidotti & Agustín Villar, 2003. "Aftermaths of Current Account Crisis: Export Growth or Import Contraction?," Business School Working Papers once, Universidad Torcuato Di Tella. [Downloadable!]
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  1. Lucas Papademos, 2007. "The Effects of Globalization on Inflation, Liquidity and Monetary Policy," NBER Chapters, in: International Dimensions of Monetary Policy National Bureau of Economic Research, Inc. [Downloadable!]
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