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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. 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.
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  8. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "Af1uencia de capital y apreciacion del tipo de cambio real en America Latina: E1 papel de los factores externos
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  9. 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.).
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  11. 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.
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  13. 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.
  14. César Calderón & Alberto Chong & Norman Loayza, 1999. "Determinants of Current Account Deficits in Developing Countries," Working Papers Central Bank of Chile 51, Central Bank of Chile.
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  16. Hamid Faruqee & Guy Debelle, 1996. "What Determines the Current Account? a Cross-Sectional and Panel Approach," IMF Working Papers 96/58, International Monetary Fund.
  17. Nouriel Roubini & Paul Wachtel, 1998. "Current Account Sustainability in Transition Economies," NBER Working Papers 6468, National Bureau of Economic Research, Inc.
  18. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47.
  19. 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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  22. 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.
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  24. 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.
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