Effects of external imbalances on GDP recovery patterns

A decade after the beginning of the Great Recession, flow external imbalances, measured by the current account (CA) have narrowed markedly. However, stock or net foreign assets (NFA) imbalances have kept increasing and have created challenges for future macroeconomic and financial stability. To date, early warning systems (scoreboards) have focused more on flow than on stock variables. To approach this problem, in this paper we analyze expansions using two complementary sets of indicators proposed by Harding and Pagan (2002) and Gadea et al. (2017) for the period 1950–2016. After controlling for a large set of explanatory variables, we find that the effect of CA imbalances is limited, except when the measures selected take into account past CA developments or some degree of persistence. In contrast, the evolution of NFA seems to have much more explanatory power in terms of the amplitude and the cumulation of the recoveries, as well as the time necessary to regain the level of ouput previous to the recession. Therefore, we conclude that future macro-prudential policies should pay more attention to stock variables to measure external imbalances due to their effects on the characteristics of recoveries.