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Revisiting External Imbalances: Insights from Sectoral Accounts

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  • Cian Allen

Abstract

This paper revisits the period of substantial widening of external imbalances in advanced economies in the run-up to the global financial crisis and their adjustment since then. We take a granular look at these imbalances through the lens of their domestic counterpart: the net financial balance of the household sector, the government, non-financial corporations, and financial corporations. Our findings challenge the often-claimed view that the household sector lies behind most of the dynamics of the current account. In fact, we show that it is the non-financial corporation and the government sectors that account for the bulk of: (i) the co-movement with the standard set of fundamental covariates of the current account; (ii) the external adjustment and expenditure reduction in the aftermath of the global financial crisis; and (iii) the diverging dynamics during large and persistent current account imbalances. These results emphasize that analyzing domestic sectoral balances can lead to a better empirical and theoretical understanding of global imbalances.

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  • Cian Allen, 2018. "Revisiting External Imbalances: Insights from Sectoral Accounts," 2018 Papers pal913, Job Market Papers.
  • Handle: RePEc:jmp:jm2018:pal913
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    Cited by:

    1. Philip R. Lane, 2019. "Globalisation: A Macro-Financial Perspective," The Economic and Social Review, Economic and Social Studies, vol. 50(2), pages 249-263.
    2. Antonia López-Villavicencio & Valérie Mignon, 2021. "Does backward participation in global value chains affect countries’ current account position?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 157(1), pages 65-86, February.
    3. Lucia Granelli & Martin Habet & Guergana Stanoeva & Gaetano D’Adamo & Robert Gampfer, 2020. "Puzzles in Non-Financial Corporate Sector Savings across the G20," European Economy - Economic Briefs 063, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Galstyan, Vahagn, 2019. "Understanding the Euro Area Current Account," Economic Letters 7/EL/19, Central Bank of Ireland.
    5. Galstyan, Vahagn, 2019. "Factor Income and the Euro Area Current Account," Economic Letters 8/EL/19, Central Bank of Ireland.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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