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Current account adjustment and capital flows

  • Gabriele Galati
  • Guy Debelle

    (Reserve Bank of Australia)

This paper examines episodes of current account adjustment in industrial countries over the past 30 years. We find that they were typically associated with a sizeable slowdown in domestic growth and a large exchange rate depreciation. There was no discernable change in the nature of capital flows in the period just prior to an adjustment, with the possible exception of non-residents' holdings of currency and deposits. This suggests that a current account adjustment may be an endogenous event - responding to the resolution of domestic imbalances - rather than an exogenous event where the size of the current account deficit itself precipitates the adjustment in the domestic economy and the exchange rate. Econometric evidence suggests that global developments trigger the adjustment, possibly because they trigger the unwinding of the domestic imbalances. We find that the bulk of the ex post adjustment of the financial account was in private sector flows, primarily on the part of foreign investors. Finally, we document some notable differences in the adjustment of the current account in the United States in 1987 compared with that observed in the other episodes.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 169.

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Length: 30 pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:bis:biswps:169
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  1. Calderon Cesar Augusto & Chong Alberto & Loayza Norman V., 2002. "Determinants of Current Account Deficits in Developing Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-33, March.
  2. C. John McDermott & Paul Cashin, 1996. "Are Australia's Current Account Deficits Excessive?," IMF Working Papers 96/85, International Monetary Fund.
  3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  4. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47, December.
  5. Gabriele Galati & Guy Debelle, 2005. "Current account adjustment and capital flows," BIS Working Papers 169, Bank for International Settlements.
  6. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
  7. Menzie David Chinn & Eswar Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries; An Empirical Exploration," IMF Working Papers 00/46, International Monetary Fund.
  8. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
  9. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2005. "Financial market developments and economic activity during current account adjustments in industrial economies," International Finance Discussion Papers 827, Board of Governors of the Federal Reserve System (U.S.).
  10. Hamid Faruqee & Guy Debelle, 1996. "What Determines the Current Account? a Cross-Sectional and Panel Approach," IMF Working Papers 96/58, International Monetary Fund.
  11. James M. Nason & John H. Rogers, 2003. "The present-value model of the current account has been rejected: round up the usual suspects," International Finance Discussion Papers 760, Board of Governors of the Federal Reserve System (U.S.).
  12. Donal McGettigan, 2000. "Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union," IMF Occasional Papers 189, International Monetary Fund.
  13. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  14. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
  15. Tudela, Merxe, 2004. "Explaining currency crises: a duration model approach," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 799-816, September.
  16. Corbo, Vittorio & Hernandez, Leonardo, 1996. "Macroeconomic Adjustment to Capital Inflows: Lessons from Recent Latin American and East Asian Experience," World Bank Research Observer, World Bank Group, vol. 11(1), pages 61-85, February.
  17. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  18. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  19. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
  20. Nouriel Roubini & Paul Wachtel, 1997. "Current Account Sustainability in Transition Economies," Working Papers 97-03, New York University, Leonard N. Stern School of Business, Department of Economics.
  21. Jonathan David Ostry, 1997. "Current Account Imbalances in AsEAN Countries; Are they a Problem?," IMF Working Papers 97/51, International Monetary Fund.
  22. Fabio Scacciavillani & Malcolm D. Knight, 1998. "Current Accounts; What is their Relevance for Economic Policymaking?," IMF Working Papers 98/71, International Monetary Fund.
  23. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January.
  24. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
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