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?
