External Adjustment and the Global Crisis

Philip Lane and Gian Maria Milesi-Ferretti ()

No 17352, NBER Working Papers from National Bureau of Economic Research, Inc

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 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.

JEL-codes: F32 F34 F41 F42 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

Published as Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2012. "External adjustment and the global crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 252-265.
Published as External Adjustment and the Global Crisis , Philip R. Lane, Gian Maria Milesi-Ferretti. in Global Financial Crisis , Engel, Forbes, and Frankel. 2012

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Journal Article: External adjustment and the global crisis (2012)
Chapter: External Adjustment and the Global Crisis (2011)
Working Paper: External Adjustment and the Global Crisis (2011)
Working Paper: External Adjustment and the Global Crisis (2011)
Working Paper: External Adjustment and the Global Crisis (2011)
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