Current Account Adjustment and Capital Flows *

Guy Debelle () and Gabriele Galati ()

Review of International Economics, 2007, vol. 15, issue 5, pages 989-1013

Abstract: We examine episodes of current account adjustment in industrial countries over the past 30 years. We find that they were typically associated with a sizable growth slowdown and a large exchange rate depreciation. There was no discernible change in the nature of capital flows just prior to an adjustment. Hence, adjustments may be responding to the resolution of domestic imbalances rather than being an exogenous event. We show that global developments triggered the adjustment, possibly by triggering the unwinding of the domestic imbalances. Most of the ex post adjustment of the financial account was in private sector flows, primarily by foreign investors. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.

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