External imbalances and recoveries

Mariam Camarero, María Dolores Gadea-Rivas, Ana Gómez-Loscos and Cecilio Tamarit
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María Dolores Gadea-Rivas: Department of Economic Structure and History and Public Economics, Applied Economics Area, GVia 2. planta 5, University of Zaragoza, 50005-Zaragoza, Spain

No 1912, Working Papers from Department of Applied Economics II, Universidad de Valencia

Abstract: A decade after the beginning of the Great Recession, flow external imbalances, measured by the current account (CA) have narrowed markedly. However, stock or net foreign assets (NFA) imbalances have kept increasing and have created challenges for future macroeconomic and financial stability. To date, early warning systems (scoreboards) have focused more on flow than on the stock variables. To approach this problem, in this paper we analyze expansions using two complementary sets of indicators proposed by Harding and Pagan (2002) and Gadea et al. (2017). After controlling for a large set of explanatory variables, we find that the effect of CA imbalances is limited, except when the measures selected take into account past CA developments or some degree of persistence. In contrast, the evolution of NFA seems to be much more explanatory of the time it takes to regain the level of output previous to the recession, as well as the amplitude and the cumulation of the recoveries. Therefore, we conclude that future macro-prudential policies should pay more attention to stock variables to measure external imbalances due to their effects on the characteristics of recoveries.

Keywords: Business cycles; recoveries; NFA; external imbalances; current account (search for similar items in EconPapers)
JEL-codes: C23 F21 R12 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-mac and nep-opm
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http://repecsrv.uv.es/paper/RePEc/pdf/eec_1912.pdf First version, 2019 (application/pdf)

Related works:
Working Paper: External imbalances and recoveries (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eec:wpaper:1912

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