IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/8546.html
   My bibliography  Save this paper

External Adjustment and the Global Crisis

Author

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

Abstract

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.

Suggested Citation

  • Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2011. "External Adjustment and the Global Crisis," CEPR Discussion Papers 8546, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8546
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8546
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
    3. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
    4. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable U.S. Current Account Position Revisited," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376, National Bureau of Economic Research, Inc.
    5. Gian-Maria Milesi-Ferretti & Cédric Tille, 2011. "The great retrenchment: international capital flows during the global financial crisis [‘The great trade collapse: what caused it and what does it mean?’]," Economic Policy, CEPR;CES;MSH, vol. 26(66), pages 289-346.
    6. Mr. Olivier J Blanchard & Mr. Gian M Milesi-Ferretti, 2009. "Global Imbalances: In Midstream?," IMF Staff Position Notes 2009/029, International Monetary Fund.
    7. Aizenman, Joshua & Jinjarak, Yothin, 2009. "Current account patterns and national real estate markets," Journal of Urban Economics, Elsevier, vol. 66(2), pages 75-89, September.
    8. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the J-curve revisited," Discussion Paper / Institute for Empirical Macroeconomics 65, Federal Reserve Bank of Minneapolis.
    9. Caroline Freund & Frank Warnock, 2007. "Current Account Deficits in Industrial Countries: The Bigger They Are, The Harder They Fall?," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 133-168, National Bureau of Economic Research, Inc.
    10. 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.
    11. Bénétrix, Agustín & Lane, Philip R., 2010. "International Differences in Fiscal Policy During the Global Crisis," CEPR Discussion Papers 8009, C.E.P.R. Discussion Papers.
    12. Charles Engel & John H. Rogers, 2006. "The U.S. current account deficit and the expected share of world output," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    13. Gian Maria Milesi Ferretti & Assaf Razin, 2000. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Chapters, in: Currency Crises, pages 285-323, National Bureau of Economic Research, Inc.
    14. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, number clar06-2, September.
    15. Chinn, Menzie D. & Ito, Hiro, 2007. "Current account balances, financial development and institutions: Assaying the world "saving glut"," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 546-569, June.
    16. Mr. Gian M Milesi-Ferretti & Mr. Philip R. Lane, 2007. "Europe and Global Imbalances," IMF Working Papers 2007/144, International Monetary Fund.
    17. 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.
    18. International Monetary Fund, 2010. "Fiscal Policy and the Current Account," IMF Working Papers 2010/121, International Monetary Fund.
    19. Morten Ravn & Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Deep Habits," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 195-218.
    20. Gianluca Benigno & Christoph Thoenissen, 2003. "Equilibrium Exchange Rates and Supply-Side Performance," Economic Journal, Royal Economic Society, vol. 113(486), pages 103-124, March.
    21. 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.
    22. Mr. Thierry Tressel & Ms. Ruo Chen & Mr. Gian M Milesi-Ferretti, 2012. "External Imbalances in the Euro Area," IMF Working Papers 2012/236, International Monetary Fund.
    23. Philip R Lane & Gian Maria Milesi-Ferretti, 2011. "The Cross-Country Incidence of the Global Crisis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(1), pages 77-110, April.
    24. Joseph E. Gagnon, 2011. "Current Account Imbalances Coming Back," Working Paper Series WP11-1, Peterson Institute for International Economics.
    25. S M Ali Abbas & Jacques Bouhga-Hagbe & Antonio Fatás & Paolo Mauro & Ricardo C Velloso, 2011. "Fiscal Policy and the Current Account," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(4), pages 603-629, November.
    26. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "Europe and Global Imbalances," The Institute for International Integration Studies Discussion Paper Series iiisdp226, IIIS.
    27. Muge Adalet & Barry Eichengreen, 2007. "Current Account Reversals: Always a Problem?," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 205-246, National Bureau of Economic Research, Inc.
    28. repec:imf:imfops:270 is not listed on IDEAS
    29. 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.
    30. Enrique G. Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, American Economic Association, vol. 100(5), pages 1941-1966, December.
    31. repec:imf:imfops:261 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mr. Gian M Milesi-Ferretti & Mr. Philip R. Lane, 2011. "External Adjustment and the Global Crisis," IMF Working Papers 2011/197, International Monetary Fund.
    2. 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.
    3. Timothy J. Kehoe & Kim J. Ruhl & Joseph B. Steinberg, 2018. "Global Imbalances and Structural Change in the United States," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 761-796.
    4. Milan Nedeljkovic & Gonzalo Varela & Michele Savini Zangrandi, 2015. "Indonesia Current Account Assessment," World Bank Publications - Reports 22340, The World Bank Group.
    5. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Kristin Forbes & Ida Hjortsoe & Tsvetelina Nenova, 2017. "Current Account Deficits During Heightened Risk: Menacing or Mitigating?," Economic Journal, Royal Economic Society, vol. 0(601), pages 571-623, May.
    7. Salvatore Dell’Erba & Dennis Reinhardt, 2011. "Surfing the Capital Waves: A sector-level examination of surges in FDI inflows," Working Papers 11.07, Swiss National Bank, Study Center Gerzensee.
    8. Broner, Fernando & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio L., 2013. "Gross capital flows: Dynamics and crises," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 113-133.
    9. Das, Debasish Kumar, 2012. "Determinants of current account imbalances in the global economy: A dynamic panel analysis," MPRA Paper 42419, University Library of Munich, Germany.
    10. Smith, Constance E., 2011. "External balance adjustment: An intra-national and international comparison," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1195-1213, October.
    11. Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2010. "Productivity shocks, budget deficits and the current account," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1562-1579, December.
    12. Hürtgen, Patrick & Rühmkorf, Ronald, 2014. "Sovereign default risk and state-dependent twin deficits," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 357-382.
    13. Dell'Erba, Salvatore & Reinhardt, Dennis, 2015. "FDI, debt and capital controls," Journal of International Money and Finance, Elsevier, vol. 58(C), pages 29-50.
    14. Moral-Benito, Enrique & Roehn, Oliver, 2016. "The impact of financial regulation on current account balances," European Economic Review, Elsevier, vol. 81(C), pages 148-166.
    15. Dong, Wei, 2012. "The role of expenditure switching in the global imbalance adjustment," Journal of International Economics, Elsevier, vol. 86(2), pages 237-251.
    16. Blaise Gnimassoun & Valérie Mignon, 2013. "Current-Account Adjustments and Exchange-Rate Misalignments," Working Papers 2013-29, CEPII research center.
    17. Arratibel, Olga & Furceri, Davide & Martin, Reiner & Zdzienicka, Aleksandra, 2011. "The effect of nominal exchange rate volatility on real macroeconomic performance in the CEE countries," Economic Systems, Elsevier, vol. 35(2), pages 261-277, June.
    18. Fratzscher, Marcel & Juvenal, Luciana & Sarno, Lucio, 2010. "Asset prices, exchange rates and the current account," European Economic Review, Elsevier, vol. 54(5), pages 643-658, July.
    19. Jonida Bollano & Delina Ibrahimaj, 2015. "Current Account Determinats in Central Eastern European Countries," IHEID Working Papers 22-2015, Economics Section, The Graduate Institute of International Studies.
    20. Jean-Baptiste Gossé & Cyriac Guillaumin, 2010. "L'impact des chocs externes sur et dans la zone euro : un modèle VAR structurel," Working Papers hal-00493384, HAL.

    More about this item

    Keywords

    current account adjustment; global crisis;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:8546. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://www.cepr.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.