The Role of Stock-Flow Adjustment during the Global Financial Crisis

While the recent contraction of current account imbalances that followed the Global Financial Crisis is well documented, we analyse the increasing divergence of the net international investment position in the post-crisis period. Decomposing the change in the international net investment position into capital flows and valuation effects we find that the increasing stock imbalances are driven by the former. However, valuation changes show a stabilizing pattern. Countries with the largest net foreign liabilities experienced the greatest valuation gains. Analysing this effect by different asset classes shows that this stabilising pattern was mainly driven by debt write-offs and a change in the value of portfolio equity. For the latter, the pro-cyclical movement of the domestic stock markets during the post-crisis period improved international risk sharing through foreign portfolio equity liabilities.