External Adjustment and the Global Crisis

Gian Maria Milesi-Ferretti () and Philip Lane

No 8546, CEPR Discussion Papers from Centre for Economic Policy Research

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 other investment flows was the main adjustment category in the financial account but that ECB liquidity and official external assistance have cushioned the exit of private capital flows for some countries.

Keywords: Current account adjustment; Global crisis (search for similar items in EconPapers)
JEL-codes: F31 F32 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-cba
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Citations: View citations in EconPapers (34)

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Related works:
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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