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Revisiting external imbalances: Insights from sectoral accounts

Cian Allen ()

Journal of International Money and Finance, 2019, vol. 96, issue C, 67-101

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 non-financial corporations and the government 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.

Keywords: Current account; External adjustment; Sectoral balance; Flow of funds (search for similar items in EconPapers)
JEL-codes: E21 F31 F32 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jimonfin.2019.05.002

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