global imbalances and external adjustment after the crisis philip r

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GLOBAL IMBALANCES AND
EXTERNAL ADJUSTMENT
AFTER THE CRISIS
PHILIP R. LANE
GIAN MARIA MILESI-FERRETTI
The views expressed are those of the authors and not
necessarily those of the IMF or its Executive Board
Background and what we do

Pre-crisis period: very easy external financing conditions, and asset
price bubbles and credit booms in a number of countries

Bonanza ended abruptly with the crisis—tighter external financing
conditions, reassessment of external credit risk for many borrowers

We study external adjustment following the global financial crisis at
two levels:

World level (evolution of global imbalances, in flow and stock terms)

Cross-country level (empirical analysis of CA adjustment and its nature,
and relation between pre-crisis external imbalances and post-crisis
performance)
Key questions

Are “global imbalances” over?

Can we relate large CA adjustments to pre-crisis
imbalances?

How did CA adjustment take place? What was the role
of exchange rate adjustment?

Do changes in policy help explain adjustment?

Is the adjustment “temporary” or “permanent”?
Related literature




Current account reversals
Global imbalances, saving glut etc.
Cross-country impact of the acute phase of the
crisis in 2008-09 (Rose-Spiegel, FrankelSaravelos, Cecchetti et al, LMF 2011…)
LMF (2012) on external adjustment during
2009-10
Global current account imbalances
4
3
Global imbalances (in
percent of world GDP)
2
1
0
-1
-2
-3
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
US
CHN
ROW
JPN
EMA
Eur deficit
Eur surplus
OIL
Discrepancy
Global current account imbalances
(projections)
4
Global Imbalances
(percent of world GDP)
WEO
projections
3
2
1
0
-1
-2
-3
2000
US
2003
JPN
Eur surplus
2006
CHN
2009
EMA
2012
OIL
ROW
2015
Eur deficit
2018
Discrepancy
Imbalances: stock positions
20
15
Net foreign assets (in
percent of world GDP)
10
5
0
-5
-10
-15
-20
-25
2000
2001
US
2002
JPN
2003
2004
Eur surplus
2005
CHN
2006
EMA
2007
OIL
2008
ROW
2009
2010
Eur deficit
2011
2012
Discrepancy
Imbalances: stock positions (projections)
25
20
WEO projections
Net foreign assets (in
percent of world GDP)
15
10
5
0
-5
-10
-15
-20
-25
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
US
JPN
Eur surplus
CHN
EMA
OIL
ROW
Eur deficit
Discrepancy
External position in Latin America
20%
Latin America and Caribbean: net foreign assets
(ratio of GDP)
10%
0%
-10%
-20%
-30%
-40%
FX Reserves
Net debt excl. FX Res
Net portfolio equity
-50%
-60%
1980
1985
1990
Net derivatives
Net FDI
NFA
1995
2000
2005
2010
Assessing pre-crisis “excess imbalances”:
Methodology (I)



Empirical CA model
Advanced economies and emerging markets,
1969-2008, 4-year averages
Determinants include:
 Demographics
 Level
of development
 Fiscal balance
 Oil prices
 etc.
Assessing pre-crisis “excess imbalances”:
Methodology (II)

Calculate difference between actual and fitted
CA value for 2005-08 period (“CA gap”)

Relate subsequent change in CA balance
(2012 minus average 2005-08) to CA gap and
NFA position

Check for differences between fixed exchange
rates and other exchange rate arrangements
Summary of results

Pre-crisis excess imbalances strongly correlated with subsequent CA
adjustment (3/4 of the “gap” unwound)

Pre-crisis imbalances strongly correlated with post-crisis demand and GDP
growth performance.

Evidence of CA adjustment reflecting expenditure compression rather than
expenditure switching

Some evidence of more post-crisis monetary policy easing by non-peggers with
excess pre-crisis CA deficits

Sharper inflation decline in pegged countries with excess pre-crisis CA deficits

Valuation changes in a generally stabilizing direction
.2
Very strong correlation between “gap” and
subsequent CA adjustment
BLG
change in CA balance 2005-08 vs. 2012
-.1
0
.1
ICE
LVA
EST
LIT IRE
PRT
SVK HUN
GRE
CRO
ROM ESPSLV
SWI
PAK
NZE
KORTAI
SER US
DEN NLD
ITA
AUS
GTM
CRI
GER
MEX THA
SAF TUR COL
PHL SWE
ELS AUT
POL
SLK
UK
CZE
BEL
FRA
URU
DR NOR
BRA
JPNARG
RUS
ISR
IND
PER
IDN SGP
CANUKR
FIN
CHL
TUN
CHN
MOR
MYS
-.2
HKG
-.2
-.1
0
current account GAP 2005-08
.1
.2
change in real domestic demand 2007-08 vs. 2012
-.2
0
.2
.4
-.4
Strong relation between CA gap and
subsequent changes in demand
CHN
IND
PER
IDN
URU
CHL
ARG
MOR SGP PHL
COL
HKG DR
BRA
ISR
CRI
TUN
THA
PAK
AUS
SAF TUR
GTM
POLRUS
CAN
KOR
NOR
SWI
MEX
SWE
TAI AUT
GER
NZE
BELFRA
US
JPN
FIN
NLD
UKR
SVK UK
ELS
CZE
DEN
ROM
SER
ITA
EST
ESP
PRT
HUN
SLV
CRO
LIT
IRE
LVA
SLK
BLG
ICE
MYS
GRE
-.2
-.1
0
Current account gap, 2005-08
Fitted values
.1
.2
Change in domestic demand, 2007-08 to 2012
change in real GDP, 2007-08 vs. 2012
-.2
0
.2
.4
Strong relation between CA gap and
subsequent changes in GDP
CHN
IND
PER
IDN ARG
URU
DR
SGP PHL
MOR
COL
CHL
ISR
TUR
POL
TAI
CRI PAK
BRA
KOR
THA
HKG GTM
AUS
TUN
SAF
SVK MEX RUS
SWE
CAN
SWI
NZE
NORAUT GER
US
ELS
BEL
FRA NLD
CZE
JPN
SER
UK
ROMEST
FIN
LIT
DEN
ESP
IRE
HUN
UKR
PRT
ITA
SLV
SLK
BLG
ICE
LVA
MYS
CRO
GRE
-.2
-.1
0
Current account gap, 2005-08
Fitted values
.1
Change in real GDP, 2007-08 to 2012
.2
How did adjustment take place?

Current account adjustment strongly
negatively correlated with
 Changes
in demand
 Changes in real GDP

No evidence of strong co-movement between
CA adjustment and RER adjustment

Expenditure compression key channel
Current account and REER
adjustment: non-pegs
change in CA balance 2005-08 vs. 2012
-.05
0
.05
.1
.15
ICE
HUN
ROM
KOR
PAK
NZE
SWI
US SER
AUS
GTM
CRI
MEX
TUR
SAF THA
POL SWE
SLK PHL COL
UK
CZE
DRNOR
BRA
JPN
ARG
ISR INDPER
RUS
SGP
IDN
CAN
UKR
CHL
TUN
CHN
-.1
MOR
-.4
-.2
URU
MYS
0
.2
change in RER 2005-08 vs. 2012
.4
.2
Current account and REER
adjustment: pegs
LVA
EST
IRE
PRT
ESP
CRO
SLV
LIT
SVK
GRE
TAI
NLDITA DEN
GER
FRA
AUTBEL ELS
FIN
-.1
change in CA balance 2005-08 vs. 2012
0
.1
BLG
HKG
-.1
-.05
0
.05
.1
change in RER 2005-08 vs. 2012
.15
Adjustment channels

Did deficit countries cut policy rates by more (to
encourage real depreciation and also sustain
demand after the big decline in inflows)?

Did inflation decline by more in countries with
negative CA gaps (in need of real depreciation)?

How did fiscal policy respond?

Did valuation effects help external adjustment?
Adjustment channels: evidence

Policy rates:
 Some
evidence of larger declines in policy rates
for non-pegs with larger negative CA gaps

Inflation rate:
 Strong
evidence of a larger decline in inflation in
pegged countries with a negative CA gap

Changes in structural fiscal balance:
 No
systematic relation between pre-crisis
imbalances and subsequent changes in the
structural fiscal balance
The role of valuation adjustments

Possible channels
 Exchange
rate adjustment
 Asset price changes may have reflected change
in growth prospects between countries with
negative vs positive CA gaps
 Debt restructuring
.4
Larger CA gaps associated with
valuation gains for non-pegs
.2
SAF
UK
Stock-flow adjustment
0
-.2
ISR
NZE
CHN
PHL
-.4
SER
ROM
PER
CAN URU
AUS
IND
COL GTM
US
ARG
BRA
JPN
CZE UKR
NOR
CRI
KOR
TUR
MOR
RUS
PAKDR
MEX
SWI POLCHL
SLK
THA
IDN
TUN SGP
HUN
SWE
-.6
MYS
-.1
0
.1
current account gap
.2
Capital flow adjustment:
primarily through net debt flows
.2
Pegged regimes: relation with CA gap
change in net debt inflows
-.2
-.1
0
.1
HKG
FIN
GRE
PRT SVK BEL
CRO
SLV
BLG
TAI
ITA ELS
FRA
AUT
NLD
GER
DEN
LIT
ESP
LVA
-.3
EST
IRE
-.15
-.1
-.05
0
current account gap
.05
.1
Capital flow adjustment:
primarily through net debt flows
.2
Non-Pegged regimes: relation with initial NFA position
change in net debt inflows
-.1
0
.1
SWI
TUN
THA ISR
CAN
SER MEX CHLMYS
MOR
PHL
PER
SLK
IDN
URU
DRTUR COL
SAF
SWE
GTM
BRA
CZE
ARG
POL CRI UKR
IND
UK
PAK US
RUS
AUS
KOR
ROM
CHN
JPN
NOR
NZE
-.2
HUN
-1
-.5
0
.5
Average NFA/GDP position, 2004-07
1
1.5
Conclusions

Very strong external CA adjustment 2007-2012
Reduction in global flow imbalances…
 …But stock imbalances still growing


CA reduction strongly associated with pre-crisis
“excesses” (current account gaps)

Some differences between pegs and non-pegs
Conclusions (II)

Adjustment reflects primarily compression of
demand and output in countries with excess
deficits, and swings in net debt flows

Modest role of REER adjustment

Looking forward: durable rebalancing or
persistently weak global demand because of
expenditure compression in deficit countries?
What are these countries’ output gaps?
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