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External Adjustment and the Global Crisis

  • Lane, Philip R.
  • Milesi-Ferretti, Gian Maria

The period preceding the global financial crisis was characterized by a substantial widening of current account imbalances across the world. Since the onset of the crisis, these imbalances have contracted to a significant extent. In this paper, we analyze the ongoing process of external adjustment in advanced economies and emerging markets. We find that countries whose pre- crisis current account balances were in excess of what could be explained by standard economic fundamentals have experienced the largest contractions in their external balance. We subsequently examine the contributions of real exchange rates, domestic demand and domestic output to the adjustment process (allowing for differences across exchange rate regimes) and find that external adjustment in deficit countries was achieved primarily through demand compression, rather than expenditure switching. Finally, we show that other investment flows was the main adjustment category in the financial account but that ECB liquidity and official external assistance have cushioned the exit of private capital flows for some countries.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8546.

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Date of creation: Aug 2011
Date of revision:
Handle: RePEc:cpr:ceprdp:8546
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  1. Aizenman, Joshua & Jinjarak, Yothin, 2008. "Current account patterns and national real estate markets," Santa Cruz Department of Economics, Working Paper Series qt1rh4s127, Department of Economics, UC Santa Cruz.
  2. Gian-Maria Milesi-Ferretti & Olivier J. Blanchard, 2009. "Global Imbalances: In Midstream?," IMF Staff Position Notes 2009/29, International Monetary Fund.
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  4. Ali Abbas, S.M. & Bouhga-Hagbe, Jacques & Fatás, Antonio & Mauro, Paolo & Velloso, Ricardo C., 2010. "Fiscal Policy and the Current Account," CEPR Discussion Papers 7859, C.E.P.R. Discussion Papers.
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  7. Barry Eichengreen & Muge Adalet, 2005. "Current Account Reversals: Always a Problem?," NBER Working Papers 11634, National Bureau of Economic Research, Inc.
  8. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2007. "Europe and Global Imbalances," IMF Working Papers 07/144, International Monetary Fund.
  9. Gian‐Maria Milesi‐Ferretti & Cédric Tille, 2011. "The great retrenchment: international capital flows during the global financial crisis," Economic Policy, CEPR;CES;MSH, vol. 26(66), pages 285-342, 04.
  10. Caroline Freund & Frank Warnock, 2005. "Current Account Deficits in Industrial Countries: The Bigger They are, the Harder They Fall?," NBER Working Papers 11823, National Bureau of Economic Research, Inc.
  11. Jaewoo Lee & Jonathan David Ostry & Alessandro Prati & Luca Antonio Ricci & Gian-Maria Milesi-Ferretti, 2008. "Exchange Rate Assessments: CGER Methodologies," IMF Occasional Papers 261, International Monetary Fund.
  12. Philip Lane & Gian Maria Milesi-Ferretti, 2010. "The Cross-Country Incidence of the Global Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp333, IIIS.
  13. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "Long-Term Capital Movements," Trinity Economics Papers 200112, Trinity College Dublin, Department of Economics.
    • Philip R. Lane & Gian Maria Milesi-Ferretti, 2002. "Long-Term Capital Movements," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 73-136 National Bureau of Economic Research, Inc.
  14. Gianluca Benigno & Christoph Thoenissen, 2002. "Equilibrium exchange rates and supply-side performance," Bank of England working papers 156, Bank of England.
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  16. Maurice Obstfeld & Kenneth Rogoff, 2005. "The unsustainable U.S. current account position revisited," Proceedings, Federal Reserve Bank of San Francisco.
  17. Ruo Chen & Gian-Maria Milesi-Ferretti & Thierry Tressel, 2012. "External Imbalances in the Euro Area," IMF Working Papers 12/236, International Monetary Fund.
  18. Joseph E. Gagnon, 2011. "Current Account Imbalances Coming Back," Working Paper Series WP11-1, Peterson Institute for International Economics.
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  21. Olivier J. Blanchard & Mitali Das & Hamid Faruqee, 2010. "The Initial Impact of the Crisis on Emerging Market Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 263-323.
  22. Menzie D. Chinn & Shang-Jin Wei, 2008. "A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?," NBER Working Papers 14420, National Bureau of Economic Research, Inc.
  23. Enrique G. Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, American Economic Association, vol. 100(5), pages 1941-66, December.
  24. Atish R. Ghosh & Jonathan David Ostry & Charalambos G. Tsangarides, 2011. "Exchange Rate Regimes and the Stability of the International Monetary System," IMF Occasional Papers 270, International Monetary Fund.
  25. Philip Lane, 2010. "International Differences in Fiscal Policy During the Global Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp336, IIIS.
  26. repec:cup:cbooks:9789279098420 is not listed on IDEAS
  27. Gruber, Joseph W. & Kamin, Steven B., 2007. "Explaining the global pattern of current account imbalances," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 500-522, June.
  28. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
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  30. repec:ucp:bknber:9780226454627 is not listed on IDEAS
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