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, this paper analyzes the increasing divergence of net international investment positions in the post-crisis period. Decomposing the change in the net international investment position into capital flows and stock-flow adjustment, I find that the increasing stock imbalances are driven by the flows. However, stock-flow adjustments show a stabilizing pattern. Countries with the largest net foreign liabilities experienced the greatest valuation gains. Analyzing this effect by different asset classes shows that this stabilizing pattern was driven by a change in the value of portfolio equity. The pro-cyclical movement of domestic stock markets during the post-crisis period improved international risk sharing through foreign portfolio equity liabilities.