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External Adjustment and the Global Crisis

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  • Mr. Gian M Milesi-Ferretti
  • Mr. Philip R. Lane

Abstract

After widening substantially in the period preceding the global financial crisis, current account imbalances across the world have contracted to a significant extent. This paper analyzes the factors underlying this process of external adjustment. It finds that countries whose pre-crisis current account balances were in excess of what could be explained by economic fundamentals have experienced the largest contractions in their external balance. External adjustment in deficit countries was achieved primarily through demand compression, rather than expenditure switching. Changes in other investment flows were the main channel of financial account adjustment, with official external assistance and ECB liquidity cushioning the exit of private capital flows for some countries.

Suggested Citation

  • Mr. Gian M Milesi-Ferretti & Mr. Philip R. Lane, 2011. "External Adjustment and the Global Crisis," IMF Working Papers 2011/197, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2011/197
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    More about this item

    Keywords

    WP; current account gap; exchange rate; Global crisis; current account; exchange rate regime; current account adjustment; gap measure; GDP ratio; gap effect; Current account balance; Exchange rate arrangements; Real exchange rates; Current account deficits; Global; Baltics;
    All these keywords.

    JEL classification:

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

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