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Patterns of Current Account Adjustment—Insights from Past Experience

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  • Bernardina Algieri
  • Thierry Bracke

Abstract

The paper examines over seventy episodes of current account adjustment in industrial and major emerging market economies. It argues that these episodes were characterised by strongly divergent economic developments. To reduce this divergence, the paper classifies episodes with similar characteristics in three groups, using cluster analysis. A majority of cases was characterised by internal adjustment through a slowdown of domestic demand and did not involve significant exchange rate movements. In some cases, the adjustment was mainly external, facilitated by a relatively modest exchange rate depreciation and without economic slowdown. Finally, some cases involved a crisis-like combination of a severe slowdown and a significant currency depreciation. Using a multinomial logit, we find that this classification of episodes helps improve the predictability of current account adjustment. JEL Classification: F32, C14, C25
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  • Bernardina Algieri & Thierry Bracke, 2011. "Patterns of Current Account Adjustment—Insights from Past Experience," Open Economies Review, Springer, vol. 22(3), pages 401-425, July.
    • Handle: RePEc:kap:openec:v:22:y:2011:i:3:p:401-425
    DOI: 10.1007/s11079-009-9126-8
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    Cited by:

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    2. Jean-Baptiste Gossé & Cyriac Guillaumin, 2011. "The impact of external shocks on the eurozone: a structural VAR model," CEPN Working Papers hal-00610024, HAL.
    3. Jean-Baptiste Gossé & Cyriac Guillaumin, 2010. "L'impact des chocs externes sur et dans la zone euro : un modèle VAR structurel," CEPN Working Papers hal-00493384, HAL.
    4. Gervais, Olivier & Schembri, Lawrence & Suchanek, Lena, 2016. "Current account dynamics, real exchange rate adjustment, and the exchange rate regime in emerging-market economies," Journal of Development Economics, Elsevier, vol. 119(C), pages 86-99.
    5. Ben Smit & Christelle Grobler & Carmen Nel, 2014. "Sudden Stops and Current Account Reversals: Potential Macroeconomic Consequences for South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 82(4), pages 616-627, December.
    6. Ehmer, Philipp, 2014. "The impact of diverging economic structure on current account imbalances in the euro area," Wittener Diskussionspapiere zu alten und neuen Fragen der Wirtschaftswissenschaft 27/2014, Witten/Herdecke University, Faculty of Management and Economics.
    7. Bernardina Algieri & Thierry Bracke, 2011. "Patterns of Current Account Adjustment—Insights from Past Experience," Open Economies Review, Springer, vol. 22(3), pages 401-425, July.
    8. Cosimo Pancaro & Christian Saborowski, 2016. "Current Account Reversals in Industrial Countries: does the Exchange Rate Regime Matter?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(2), pages 107-130, April.
    9. Yin-Wong Cheung & Sven Steinkamp & Frank Westermann, 2020. "A Tale of Two Surplus Countries: China and Germany," Open Economies Review, Springer, vol. 31(1), pages 131-158, February.
    10. Sergio V. Barone & Ricardo Descalzi & Alberto M. Díaz Cafferata, 2012. "Trade variables and Current Account “reversals”: Does the choice of definition matter? An application to Latin American countries," Revista de Economía y Estadística, Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Instituto de Economía y Finanzas, vol. 50(1), pages 123-141, Diciembre.
    11. Theofilakou, Nancy & Stournaras, Yannis, 2012. "Current account adjustments in OECD countries revisited: The role of the fiscal stance," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 719-734.
    12. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2013. "The Macroeconomic Effects of Large Exchange Rate Appreciations," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 24(3), pages 471-494.
    13. Olivier Gervais & Lawrence L. Schembri & Lena Suchanek, 2011. "External Stability, Real Exchange Rate Adjustment and the Exchange Rate Regime in Emerging-Market Economies," Discussion Papers 11-5, Bank of Canada.
    14. Santiago Rossi & Fernando Toledo, 2022. "Estimation and prediction of current account deficit adjustment dynamics," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(80), pages 100-139, November.
    15. Oguzhan Ozcelebi & Nurtac Yildirim, 2017. "Interrelations Between External and Internal Macroeconomic Factors: Empirical Evidence on Some OECD Countries," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 15(2), pages 147-174.
    16. Raza, Hamid & Zoega, Gylfi & Kinsella, Stephen, 2018. "Capital inflows, crisis and recovery in small open economies," Finance Research Letters, Elsevier, vol. 27(C), pages 273-282.
    17. Lucas Papademos, 2007. "The Effects of Globalization on Inflation, Liquidity and Monetary Policy," NBER Chapters, in: International Dimensions of Monetary Policy, pages 593-608, National Bureau of Economic Research, Inc.
    18. Antonis Adam & Panos Hatzipanayotou & Thomas Moutos, 2015. "Labour Market Regulation, Fiscal Consolidation, and the Success of Current Account Adjustments," DEOS Working Papers 1517, Athens University of Economics and Business.
    19. Thierry Bracke & Matthieu Bussière & Michael Fidora & Roland Straub, 2010. "A Framework for Assessing Global Imbalances," The World Economy, Wiley Blackwell, vol. 33(9), pages 1140-1174, September.
    20. Yabin Wang, 2017. "How Do Emerging Markets Respond to Macroeconomic Shocks? - Dynamic Panel Evidence on the Effects of Disasters," Open Economies Review, Springer, vol. 28(4), pages 731-760, September.
    21. Hickey, Ronan, 2007. "How Sustainable are Global Imbalances?," Quarterly Bulletin Articles, Central Bank of Ireland, pages 85-119, October.
    22. repec:dau:papers:123456789/6913 is not listed on IDEAS

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    More about this item

    Keywords

    External imbalances; Current account adjustment; Cluster analysis; Multinomial logit; Expenditure switching; Expenditure reduction; F32; C14; C25;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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