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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
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Handle: RePEc:cpr:ceprdp:8546
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  1. 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.
  2. 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.
  3. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "Europe and Global Imbalances," The Institute for International Integration Studies Discussion Paper Series iiisdp226, IIIS.
  4. Philip Lane, 2010. "International Differences in Fiscal Policy During the Global Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp336, IIIS.
  5. 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.
  6. Gian-Maria Milesi-Ferretti & Cedric Tille, 2011. "The Great Retrenchment: International Capital Flows During the Global Financial Crisis," Working Papers 382011, Hong Kong Institute for Monetary Research.
  7. Enrique G. Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, American Economic Association, vol. 100(5), pages 1941-66, December.
  8. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The S-Curve," NBER Working Papers 4242, National Bureau of Economic Research, Inc.
  9. Barry Eichengreen & Muge Adalet, 2005. "Current Account Reversals: Always a Problem?," NBER Working Papers 11634, National Bureau of Economic Research, Inc.
  10. Milesi-Ferretti, Gian Maria & Razin, Assaf, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," CEPR Discussion Papers 1921, C.E.P.R. Discussion Papers.
  11. 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.
  12. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2001. "Long-Term Capital Movements," IMF Working Papers 01/107, International Monetary Fund.
    • 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.
  13. Philip R Lane & Gian Maria Milesi-Ferretti, 2011. "The Cross-Country Incidence of the Global Crisis," IMF Economic Review, Palgrave Macmillan, vol. 59(1), pages 77-110, April.
  14. 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.
  15. 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.
  16. 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.
  17. 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.
  18. Ruo Chen & Gian-Maria Milesi-Ferretti & Thierry Tressel, 2012. "External Imbalances in the Euro Area," IMF Working Papers 12/236, International Monetary Fund.
  19. Kristin J. Forbes & Francis E. Warnock, 2011. "Capital Flow Waves: Surges, Stops, Flight, and Retrenchment," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  20. Gianluca Benigno & Christoph Thoenissen, 2003. "Equilibrium Exchange Rates and Supply-Side Performance," Economic Journal, Royal Economic Society, vol. 113(486), pages C103-C124, March.
  21. 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.
  22. 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.
  23. Richard H. Clarida, 2006. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Working Papers 12194, National Bureau of Economic Research, Inc.
  24. Blanchard, Olivier J & Milesi-Ferretti, Gian Maria, 2010. "Global Imbalances: In Midstream?," CEPR Discussion Papers 7693, C.E.P.R. Discussion Papers.
  25. Morten Ravn & Stephanie Schmitt-Grohé & Mart�n Uribe, 2006. "Deep Habits," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 195-218.
  26. Joseph E. Gagnon, 2011. "Current Account Imbalances Coming Back," Working Paper Series WP11-1, Peterson Institute for International Economics.
  27. 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.
  28. repec:ucp:bknber:9780226454627 is not listed on IDEAS
  29. 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.
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