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External adjustment and the global crisis

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. Charles Engel & John H. Rogers, 2006. "The U.S. current account deficit and the expected share of world output," International Finance Discussion Papers 856, Board of Governors of the Federal Reserve System (U.S.).
  2. Ali Abbas, S.M. & Bouhga-Hagbe, Jacques & Fatás, Antonio & Mauro, Paolo & Velloso, Ricardo C., 2010. "Fiscal Policy and the Current Account," CEPR Discussion Papers 7859, C.E.P.R. Discussion Papers.
  3. Enrique G. Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, American Economic Association, vol. 100(5), pages 1941-66, December.
  4. Gian-Maria Milesi-Ferretti & Assaf Razin, 1998. "Current Account Reversals and Currency Crisis; Empirical Regularities," IMF Working Papers 98/89, International Monetary Fund.
  5. Jaewoo Lee & Jonathan David Ostry & Alessandro Prati & Luca Antonio Ricci & Gian-Maria Milesi-Ferretti, 2008. "Exchange Rate Assessments: CGER Methodologies," IMF Occasional Papers 261, International Monetary Fund.
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  13. Ruo Chen & Gian-Maria Milesi-Ferretti & Thierry Tressel, 2012. "External Imbalances in the Euro Area," IMF Working Papers 12/236, International Monetary Fund.
  14. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable U.S. 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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  18. Caroline Freund & Frank Warnock, 2007. "Current Account Deficits in Industrial Countries: The Bigger They Are, The Harder They Fall?," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 133-168 National Bureau of Economic Research, Inc.
  19. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
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  23. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "Long-Term Capital Movements," CEG Working Papers 20018, Trinity College Dublin, Department of Economics.
    • Philip R. Lane & Gian Maria Milesi-Ferretti, 2002. "Long-Term Capital Movements," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 73-136 National Bureau of Economic Research, Inc.
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