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An Assessment of the Disorderly Adjustment Hypothesis for Industrial Economies

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  • Hilary Croke
  • Steven B. Kamin
  • Sylvain Leduc

Abstract

Much has been written about prospects for US current account adjustment, including the possibility of what is sometimes referred to as a ‘disorderly correction’: a sharp fall in the exchange rate that boosts interest rates, depresses stock prices and weakens economic activity. This paper assesses some of the empirical evidence bearing on the plausibility of the disorderly adjustment scenario, drawing on the experience of previous current account adjustments in industrial economies. We examined the paths of key economic performance indicators before, during and after the onset of adjustment, building on the analysis of Freund (2000). We found little evidence among past adjustment episodes of the features highlighted by the disorderly adjustment hypothesis. Although some episodes in our sample experienced significant shortfalls in GDP growth after the onset of adjustment, these shortfalls were not associated with significant and sustained depreciations of real exchange rates, increases in real interest rates or declines in real stock prices. By contrast, it was among the episodes where GDP growth picked up during adjustment that the most substantial depreciations of real exchange rates occurred. These findings do not preclude the possibility that future current account adjustments could be disruptive, but they weaken the historical basis for predicting such an outcome.

Suggested Citation

  • Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2006. "An Assessment of the Disorderly Adjustment Hypothesis for Industrial Economies," International Finance, Wiley Blackwell, vol. 9(1), pages 37-61, May.
  • Handle: RePEc:bla:intfin:v:9:y:2006:i:1:p:37-61
    DOI: 10.1111/j.1468-2362.2006.00033.x
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    1. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable US Current Account Position Revisited," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Chen Fang & Cheng-te Lee, 2014. "Coexistence of Sustained External Imbalance and Real Exchange Rate Misalignment: The Underlying Fundamentals," Economics Bulletin, AccessEcon, vol. 34(3), pages 1714-1722.
    2. Gian Maria Milesi‐Ferretti, 2008. "Fundamentals at Odds? The US Current Account Deficit and Dollar," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 37(3), pages 259-281, November.
    3. Steven B. Kamin & Trevor A. Reeve & Nathan Sheets, 2009. "U.S. External Adjustment: Is It Disorderly? Is It Unique? Will It Disrupt The Rest Of The World?," Contemporary Economic Policy, Western Economic Association International, vol. 27(2), pages 265-292, April.
    4. William D. Craighead & David R. Hineline, 2013. "As the Current Account Turns: Disaggregating the Effects of Current Account Reversals in Industrial Countries," The World Economy, Wiley Blackwell, vol. 36(12), pages 1516-1541, December.
    5. Michael D. Bordo & Robert N. McCauley, 2019. "Triffin: Dilemma or Myth?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(4), pages 824-851, December.
    6. Carol C. Bertaut & Steven B. Kamin & Charles P. Thomas, 2008. "How long can the unsustainable U.S. current account deficit be sustained?," International Finance Discussion Papers 935, Board of Governors of the Federal Reserve System (U.S.).
    7. William D. Craighead & David R. Hineline, 2015. "Current account reversals and structural change in developing and industrialized countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 24(1), pages 147-171, February.
    8. Jiří Pour, 2020. "Context of external economic imbalances adjustments and long-term economic growth [Analýza souvislostí strukturální nápravy vnější ekonomické nerovnováhy a dlouhodobého ekonomického růstu]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(1), pages 5-26.

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