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### I. Introduction: purpose and research question
- Over five years have passed since the most intense phase of the global financial crisis.
- Key research question: Was the initial adjustment after the crisis driven mainly by cyclical factors (e.g., sharp decline in domestic demand in deficit countries and initially declining commodity prices) or has the external adjustment process been more protracted, with a stronger structural component?
- Paper objectives:
  - Illustrate how global current account imbalances have narrowed since the crisis while stock imbalances have continued to increase (Section II).
  - Provide cross-country evidence on current account adjustment after the crisis, documenting how the extent of adjustment is strongly correlated with measures of pre-crisis “excess imbalances”.
  - Extend earlier work (Lane and Milesi-Ferretti, 2012) by using a longer post-crisis period to better incorporate effects of the crisis in the euro area and to provide a medium-term analysis less contaminated by purely cyclical factors.

### II. Global imbalances after the crisis — trends in flows and stocks
- Pre-crisis pattern and timeline:
  - Global imbalances peaked in 2007-08 and shrank sharply in 2009, reflecting a global downturn and sharply lower oil prices.
  - Imbalances increased in 2010 with the recovery in global output and oil prices, and subsequently continued to shrink.
  - The US deficit shrank by over 1 percent of world GDP during the period 2006-13 (0.7 percent between 2007 and 2013).
  - Current account deficits in the “rest of the world” increased by some 0.3 percent of world GDP (reflecting primarily Australia, Brazil, Canada, France, India, and Mexico).
  - Among surplus countries, Asian economies (China, Japan, as well as other East Asian economies) experienced the biggest decline relative to 2007 (0.8 percent of world GDP).
- Dispersion and stock positions:
  - Weighted measure (sum of absolute value of current account balances, divided by world GDP) and unweighted measure (median CA/GDP) both show decline after the crisis.
  - Net external (stock) positions have not shrunk as a ratio of GDP; they have widened since 2007.
  - As of 2012, four major creditor groups with roughly similar net foreign assets (in the order of $3 trillion): oil exporters, Japan, China and other East Asian economies, and European surplus countries.
  - Three major debtor areas with liabilities of over $4 trillion: the United States, European deficit countries, and the rest of the world.
  - Six countries (Australia, Brazil, Canada, France, India, and Mexico) account for the lion share of the rest of the world’s liabilities.
  - Despite reductions in flow imbalances, creditor and debtor positions as a share of world GDP increased in absolute terms for all depicted countries and regions.
  - Only region for which absolute size of the position relative to domestic GDP has shrunk since 2012 is East Asia (including China), reflecting rapid GDP growth.
  - Dispersion of net foreign asset positions (weighted and unweighted measures) shows a trend toward rising dispersion not interrupted by the crisis.

### Medium-term outlook (WEO basis)
- Spring 2014 WEO projections:
  - Current account imbalances continued to shrink in 2013 and are projected to post a further modest decline over the medium term.
  - Projections envisage some widening of surpluses in Asian economies in relation to world GDP (particularly China) over the next five years, more than offset by projected shrinking surplus in advanced European countries and especially oil exporters.
  - Deficits of other European countries and the rest of the world are both expected to shrink over the next five years; the U.S. deficit is expected to remain broadly stable.
- Output gap evidence:
  - Estimated output gap is negative for both deficit and surplus countries and larger for deficit countries (difference relatively modest), suggesting some cyclical narrowing of current account balances in 2012-13.
- Stock projections (assuming change in NFA = projected CA):
  - Despite retrenchment in current account balances, net positions still point to widening over time.
  - Absent stabilizing valuation changes, further compression of current account balances will be needed to prevent net external positions from getting larger in relation to world GDP.

### Latin America — historical patterns and projections
- Regional current account balance:
  - Improved steadily between 1998 and 2006, reaching a surplus of 1½ percent of regional GDP in 2006.
  - Deteriorated since 2006, including a sharp worsening in 2013.
- Net foreign asset position and composition:
  - Net debt position improved from over -40 percent of GDP in 1987 to – 6 percent of GDP in 2008.
  - Stock of foreign exchange reserves increased by some 10 percentage points of GDP.
  - External finance shifted toward FDI and portfolio equity.
- Crisis-era dynamics and heterogeneity:
  - Initial improvement in external position during the recent crisis due to change in net position in foreign currency, decline in external debt, increase in FDI and portfolio equity liabilities, and accumulation of reserves.
  - Sharp depreciation of regional currencies and decline in stock market valuations reduced value of foreign claims on the region.
  - Central America and the Caribbean experienced steady deterioration in net external position; Caribbean levels particularly high.
- Projections:
  - WEO projections envisage a further modest deterioration of the regional current account balance after 2013.
  - Regional current account deficit (excluding oil exporters) would rise as a fraction of the “rest of the world” deficit (from 1/5 in 2012 to over 1/3 in 2018).
  - Forward-looking projection based on 2012 NFA, 2013 CA, and WEO 2014-19 suggests further deterioration of region’s NFA by some 10 percentage points of GDP.
  - Net external liabilities of the region account for about 1/3 of the net external liabilities of the “rest of the world” group; ratio remains broadly stable during projection period.

### Measuring pre-crisis “excess” imbalances and empirical strategy
- CAGAP (current account gap) definition:
  - Difference between actual average current account balance during 2005-2008 and fitted value from medium-term regression relating current account balances to fundamentals (demographics, output per capita, output growth, fiscal balance, natural resources, lagged NFA, financial center status, past crises).
- Sample and robustness:
  - Country sample: 64 advanced economies and emerging markets; excludes major oil exporters, countries with per capita income in 2007 below $1000, and countries with GDP below $20 billion in 2007.
  - Correlation between actual and model-implied current account values for 2005-2008 is 0.74.
  - Alternative gap (EBA methodology) yields residuals highly correlated with CAGAP; empirical work uses CAGAP due to larger sample.
- Key correlations:
  - Bivariate correlation (CAGAP vs subsequent change in CA between 2005-08 and 2012) is strongly negative.
  - Correlation between 2008-2010 change and 2008-2012 change in CA is 0.85.

### Regression framework and main results on external adjustment (2005-08 to 2012)
- Baseline regressions include CAGAP and pre-crisis (2004-07 average) NFA (NFA/GDP 2004-07).
- Main findings (Table 3 summary):
  - CAGAP significant at the one percent level across specifications.
  - Baseline coefficient suggests over ¾ of the estimated pre-crisis current account gap was closed over the 2005-08 to 2012 period for the typical country.
  - No statistically significant difference across exchange rate regimes in relation between CAGAP and scale of CA adjustment.
  - Countries with more negative initial NFA and operating under a pegged regime underwent greater CA adjustment (result specific to peggers).
  - Scale of adjustment has increased relative to the 2008-2010 correction (which was close to 0.6).
- Selected numeric highlights from Tables 3–5:
  - Table 3: CA gap coefficient estimates range from -0.76*** to -0.54*** across specifications; NFA/GDP 2004-07 coefficients include -0.02*, -0.04**.
  - Table 5 (change in domestic demand and output 2007-08 to 2012):
    - CA gap coefficients for domestic demand: 1.69***, 1.51***, 0.79*.
    - CA gap coefficients for output: 0.98***, 0.92***, 0.15.
    - NFA/GDP 2004-07 coefficients for domestic demand: 0.04**, 0.01, 0.10***; for output: 0.02, 0.00, 0.07***.

### Adjustment mechanisms — exchange rates, demand, output
- Bivariate patterns:
  - Non-peggers: real exchange rates tended to depreciate when current account improved.
  - Peggers: opposite sign; relative price changes did not help adjustment.
  - Changes in domestic demand and output highly correlated with current account improvements: improvements typically associated with poorer macro outcomes (less positive or negative expenditure and output growth).
- Regression evidence:
  - Real exchange rate regressions (Table 4): for non-peggers, stock positions matter more than CAGAP for exchange rate adjustment; for peggers, real exchange rates tended to appreciate for countries with negative CAGAP and negative net external liabilities.
  - Overall: limited support for “expenditure switching”; burden of adjustment was mainly “expenditure reduction.”

### Policy rates, inflation, fiscal balance, and valuation effects (adjustment channels)
- Policy interest rates (Table 6, Figure 13):
  - Bivariate: countries with negative CAGAP tended to have the largest policy rate reductions.
  - Non-peggers with more negative CAGAP undertook larger cuts in policy rates during the crisis; peggers do not show similar pattern except when Baltics are excluded.
  - Monetary autonomy (non-peggers) facilitated policy rate cuts that could support real depreciation.
  - Table 6: CA gap coefficients include 0.12***, 0.18***, 0.18***; interaction CA gap*peg = -0.17** in one specification.
- Inflation (Table 7, Figure 14):
  - Bivariate suggests countries with negative CAGAP reduced inflation.
  - Regression: significant relation between CAGAP and inflation only for peggers (peggers with more negative CAGAP experienced reduction in inflation rates relative to pre-crisis levels).
  - Table 7 selected coefficients: CA gap values include 0.10*, 0.03, 0.03 and 0.26***, 0.07, 0.19*** across specifications; CA gap*peg = 0.24*** in one specification. NFA/GDP 2004-07 shows 0.01** in one specification.
- Fiscal balance (Table 8, Figure 15):
  - Virtually no correlation between pre-crisis imbalances and subsequent changes in structural fiscal balance.
  - Table 8 key results:
    - CA gap coefficients across columns: (1) -0.04 [-0.71]; (2) 0.02 [0.38]; (3) -0.08 [-0.61]; (4) 0.02 [0.45].
    - NFA/GDP 2004-07 coefficients are effectively -0.00 with t-statistics [-0.32], [-0.21], [-0.42], [-0.45].
    - Observations: (1) 62; (2) 40; (3) 22; (4) 62. R-squared range: 0.00–0.06.
- Valuation and stock-flow adjustments (SFA) (Table 9, Figure 16):
  - Accounting identity used: change in NFA = -current account + valuation and other adjustments + residuals.
  - Bivariate: countries with more negative CAGAP tended to experience net gains on NIIP via non-flow adjustments.
  - Regression evidence (Table 9):
    - CA gap coefficients: (1) -1.62*** [-3.13]; (2) -1.85*** [-3.11]; (3) -1.69*** [-2.76]; (4) -0.49 [-0.69]; (5) 0.24 [0.34].
    - CA gap * peg in column (5): 1.65* [1.92].
    - NFA/GDP 2004-07 shows some positive significance in column (4): 0.13** [2.37].
    - Observations: (1) 62; (2) 62; (3) 41; (4) 21; (5) 20. R-squared range: 0.00–0.36.
  - Interpretation:
    - For non-peggers, SFA term moved in a stabilizing direction: countries with most negative CAGAP experienced more positive SFA terms.
    - For peggers, no robust stabilizing pattern; some destabilizing evidence not robust to excluding Hong Kong.
    - Favorable valuation effects for non-peggers may reflect exchange rate depreciation combined with portfolio composition and asset price adjustments.

### Composition of adjustment and trade dynamics (Table 10, Figure 17)
- Components of current account adjustment:
  - Lion share of changes in current account balances 2005-08 to 2012 accounted for by changes in balance on goods and services.
  - Changes in income balance virtually uncorrelated with CA changes; transfers significant only for a few remittance-reliant countries.
- Trade volume regressions (Table 10):
  - Exports (columns 1–3):
    - CA gap coefficients: (1) -0.19** [-2.49]; (2) -0.11 [-1.16]; (3) -0.05 [-0.26].
    - NFA/GDP 2004-07: (1) 0.00 [0.24]; (2) -0.01 [-1.02]; (3) 0.03** [2.22].
    - Log change in REER: (1) 0.07 [1.30]; (2) 0.05 [0.90]; (3) 0.52** [2.50].
    - Observations exports: (1) 64; (2) 42; (3) 22. R-squared: 0.08, 0.04, 0.31.
  - Imports (columns 4–6):
    - CA gap coefficients: (4) 0.33*** [3.09]; (5) 0.33** [2.26]; (6) 0.60*** [3.14].
    - NFA/GDP 2004-07: (4) 0.01 [0.99]; (5) -0.02*** [-2.75]; (6) 0.06*** [3.82].
    - Log change in REER: (4) 0.21*** [3.82]; (5) 0.26*** [3.85]; (6) 0.65*** [3.27].
    - Peg in column (6): -0.06*** [-3.89].
    - Observations imports: (4) 64; (5) 42; (6) 22. R-squared: 0.50, 0.46, 0.44.
  - Findings:
    - Countries with more negative CAGAP experienced both faster export growth and slower import growth in bivariate patterns; regression evidence shows scale of import adjustment is roughly twice the scale of export adjustment vis-à-vis CAGAP — consistent with “expenditure reduction.”
    - Specification explains sizable component of cross-country variation in import growth, but only modest share of export growth.
    - Strong positive correlation between import growth and REER changes; exports also show positive relation with REER in some samples, driven by Baltics within peg sample.
    - Export performance post-crisis weakly correlated with pre-crisis imbalances and with post-crisis output and import growth in trading partners — possible role of value chains and gross vs value-added export linkages.

### Conclusions — summary findings and policy implications
- Narrowing of current account imbalances:
  - Significant narrowing of global current account imbalances following the 2008 financial crisis.
  - Projections suggest further compression in current account imbalances in coming years.
  - Despite compression in flows, stock imbalances have continued to expand in relation to domestic GDP and global GDP (as of end-2012).
- Stock positions at end-2012 (selected numeric indicators from Table 1: Net external position (ratio of domestic GDP) 1/):
  - Oil exporters: 50.3 55.7
  - East Asia: 27.5 26.1
  - Europe surplus: 22.4 44.3
  - Japan: 50.1 56.8
  - US: -14.4 -27.4
  - Europe deficit: -45.6 -51.7
  - Rest of the world: -23.5 -29.3
  - 1/ Net external position excludes gold holdings.
- Cross-country evidence:
  - Pre-crisis CA gaps and pre-crisis NFA explain important part of subsequent cross-country differences in demand growth.
  - Real exchange rates moved in a stabilizing direction only for countries without exchange rate pegs, and only modestly.
  - External adjustment involved very costly declines in demand in high deficit countries, with dramatic output declines relative to pre-crisis forecasts.
- Monetary policy, exchange rate regimes, valuation effects:
  - Monetary policy changes correlated with initial imbalances for non-peggers: countries with excess deficits cut interest rates by more.
  - Correlation does not hold for pegged regimes (sample dominated by euro area).
  - Suggestive evidence that valuation changes have been stabilizing, but only for non-peggers.
- Costs of adjustment and policy implications:
  - Narrowing large external imbalances can inflict considerable macroeconomic pain on deficit countries if adjustment is sharp and limited in time.
  - Countries that lack monetary autonomy are particularly vulnerable to costly adjustment.
  - From a global perspective, findings reinforce case for policy configurations that make adjustment less costly through:
    - Less expenditure compression in deficit countries; and/or
    - Faster demand growth in surplus countries.
  - For individual countries, results motivate examination of preventive policies to curb excessive and persistent deficits.

*Source: _wp14151 (IMF working paper content unit) — extracted text provided in the input.*

### References .............................................................................................................

### _wp14151 - References

### I. Introduction
- Over five years have passed since the most intense phase of the global financial crisis.
- Pre-crisis period characterized by increased dispersion in current account deficits and surpluses, facilitated by a benign global financial environment with low risk aversion by borrowers and lenders and low volatility.
- The crisis led to a drastic change in the global financial environment and a sharp compression of current account balances.
- Key research question: Was the initial adjustment after the crisis driven mainly by cyclical factors (e.g., sharp decline in domestic demand in deficit countries and initially declining commodity prices) or has the external adjustment process been more protracted, with a stronger structural component?
- Paper objectives:
  - Illustrate how global current account imbalances have narrowed since the crisis while stock imbalances have continued to increase (Section II).
  - Provide cross-country evidence on current account adjustment after the crisis, documenting how the extent of adjustment is strongly correlated with measures of pre-crisis “excess imbalances” (second part of the paper).
  - Extend earlier work (Lane and Milesi-Ferretti, 2012) by using a longer post-crisis period to better incorporate effects of the crisis in the euro area and to provide a medium-term analysis less contaminated by purely cyclical factors.
- Related literatures cited include research on current account reversals and sudden stops; causes and consequences of global imbalances; and cross-country impact of the global financial crisis.

### II. Global imbalances after the crisis
- Decade before the crisis: sharp widening of global imbalances supported by large increases in capital flows and cross-border financial holdings, particularly in advanced economies.
- During and after the crisis: capital flows declined sharply and current account balances contracted.
- Focus of section: trends in current account balances and net external positions globally and for Latin America.

A. Global trends
- Country grouping follows Blanchard and Milesi-Ferretti (2010); European countries with current account surpluses grouped separately from those with current account deficits.
- Pre-crisis pattern:
  - Widening U.S. current account deficit.
  - Growing current account deficits in the “euro area periphery”, the United Kingdom, and Central and Eastern Europe.
  - Surges in surpluses in emerging Asian countries (especially China), major oil exporters, and some advanced euro-area and northern European economies.
- Timeline of imbalances:
  - Global imbalances peaked in 2007-08 and shrank sharply in 2009, reflecting a global downturn and sharply lower oil prices.
  - Imbalances increased in 2010 with the recovery in global output and oil prices, and subsequently continued to shrink.
- Country-pattern of adjustment (as reported):
  - The US deficit shrank by over 1 percent of world GDP during the period 2006-13 (0.7 percent between 2007 and 2013).
  - Current account imbalances in “deficit Europe” shrank by 80 percent (about [text truncates here]).

*Source: _wp14151 - References*

### 0.7 percent of world GDP) between 2007 and 2013.  In contrast, current account deficits in the

### _wp14151 - 0.7 percent of world GDP) between 2007 and 2013.  In contrast, current account deficits in the

### Global imbalances: recent evolution and stock positions
- Current account deficits in the “rest of the world” increased by some 0.3 percent of world GDP (reflecting primarily the deficits of Australia, Brazil, Canada, France, India, and Mexico).
- Among surplus countries, Asian economies (China, Japan, as well as other East Asian economies) experienced the biggest decline relative to 2007 (0.8 percent of world GDP).
- Surpluses in oil exporters declined modestly; surpluses of other advanced European countries were broadly unchanged.
- Measures of current account dispersion:
  - Weighted measure: sum of absolute value of current account balances, divided by world GDP — shows decline after the crisis.
  - Unweighted measure: median value of current account to domestic GDP ratio — also shows decline after the crisis.
- Net external (stock) positions have not shrunk as a ratio of GDP; they have widened since 2007.
  - As of 2012, four major creditors with roughly similar net foreign assets (in the order of $3 trillion): oil exporters, Japan, China and other East Asian economies, and European surplus countries.
  - Three major debtor areas with liabilities of over $4 trillion: the United States, European deficit countries, and the rest of the world.
  - Six countries (Australia, Brazil, Canada, France, India, and Mexico) account for the lion share of the rest of the world’s liabilities.
- Despite reductions in flow imbalances, creditor and debtor positions as a share of world GDP increased in absolute terms for all depicted countries and regions.
- Table 1 (referenced) shows that the only region for which the absolute size of the position relative to domestic GDP has shrunk since 2012 is East Asia (including China), reflecting rapid GDP growth.
- Dispersion of creditor and debtor positions:
  - Weighted measure (sum of absolute value of net foreign asset positions, scaled by world GDP) and unweighted measure (median ratio of net foreign assets to domestic GDP) show a trend towards rising dispersion that was not interrupted by the crisis.

### Medium-term outlook for current account imbalances (WEO basis)
- Spring 2014 WEO projections:
  - Current account imbalances continued to shrink in 2013 and are projected to post a further modest decline over the medium term.
  - Projections envisage some widening of surpluses in Asian economies in relation to world GDP (particularly China) over the next five years.
  - This is more than offset by a projected shrinking surplus in advanced European countries and especially oil exporters.
  - Deficits of other European countries and the rest of the world are both expected to shrink over the next five years; the U.S. deficit is expected to remain broadly stable.
- Output gap evidence (WEO database):
  - Estimated output gap is negative for both deficit and surplus countries and larger for deficit countries, suggesting some cyclical narrowing of current account balances in 2012-13.
  - The difference in output gaps is relatively modest.
- Stock projections assuming change in net foreign assets equals projected current account balances:
  - Despite retrenchment in current account balances, net positions still point to widening over time.
  - Absent stabilizing valuation changes (e.g., rising asset prices or appreciating exchange rates in surplus countries), further compression of current account balances will be needed to prevent net external positions from getting larger in relation to world GDP.

### Latin America: historical patterns and projections
- Regional current account balance (cross-country sum divided by region’s GDP):
  - Improved steadily between 1998 and 2006, reaching a surplus of 1½ percent of regional GDP in 2006.
  - Deteriorated since 2006, including a sharp worsening in 2013.
- Net foreign asset position and composition:
  - Net debt position improved from over -40 percent of GDP in 1987 to – 6 percent of GDP in 2008.
  - Stock of foreign exchange reserves increased by some 10 percentage points of GDP.
  - External finance shifted toward FDI and portfolio equity.
- Crisis-era dynamics:
  - Unlike previous crises, during the recent crisis the region’s external position improved initially due to a change in the net position in foreign currency, decline in external debt, increase in FDI and portfolio equity liabilities, and accumulation of reserves.
  - Sharp depreciation of regional currencies and decline in stock market valuations reduced value of foreign claims on the region.
- Heterogeneity within the region:
  - Central American and Caribbean countries experienced steady deterioration in net external position; Caribbean levels are particularly high.
  - Higher commodity prices boosted South American commodity exporters but worsened terms of trade for commodity-importing countries in the Caribbean and Central America.
- Projections and forward-looking estimates:
  - WEO current account projections envisage a further modest deterioration of the regional current account balance after 2013.
  - In a global context, the regional current account deficit (excluding oil exporters) would rise as a fraction of the “rest of the world” deficit (from 1/5 in 2012 to over 1/3 in 2018).
  - A simple forward-looking projection based on 2012 net foreign asset positions, the 2013 current account balance, and WEO projections for 2014-19 suggests further deterioration of the region’s net foreign asset position by some 10 percentage points of GDP.
  - The net external liabilities of the region account for about 1/3 of the net external liabilities of the “rest of the world” group; this ratio remains broadly stable during the projection period.

### Measuring pre-crisis “excess” imbalances and empirical strategy
- Current account “gap” (CAGAP) measure:
  - Defined as the difference between actual average current account balance during 2005-2008 and the fitted value from a medium-term regression relating current account balances to macro-financial fundamentals (demographics, output per capita, output growth, fiscal balance, natural resources, lagged NFA, financial center status, past crises).
  - Country sample includes 64 advanced economies and emerging markets (appendix); excludes major oil exporters, countries with per capita income in 2007 below $1000, and countries with GDP below $20 billion in 2007.
  - Correlation between actual and model-implied current account values for 2005-2008 is 0.74.
- Robustness:
  - An alternative gap using the EBA methodology (IMF 2013) yields residuals highly correlated with CAGAP.
  - Empirical work uses CAGAP due to larger sample availability.
- Key correlations:
  - Bivariate correlation (CAGAP vs subsequent change in current account between 2005-08 and 2012) is strongly negative: countries with largest negative gaps experienced biggest improvements; those with largest positive gaps saw largest declines.
  - Correlation between 2008-2010 change and 2008-2012 change in current account is 0.85, indicating persistence beyond the acute crisis phase.

### Regression framework and main results on external adjustment (2005-08 to 2012)
- Baseline regression for change in current account balance (2005-08 to 2012) includes:
  - Pre-crisis current account gap (CAGAP) and pre-crisis (2004-07 average) net foreign assets (,0407i NFA).
- Main findings (Table 3 summary):
  - CAGAP is significant at the one percent level across specifications.
  - Baseline coefficient suggests over ¾ of the estimated pre-crisis current account gap was closed over the 2005-08 to 2012 period for the typical country.
  - No statistically significant difference across exchange rate regimes in the relation between CAGAP and scale of current account adjustment.
  - Countries with more negative initial NFA and operating under a pegged regime underwent greater current account adjustment (this result is specific to peggers).
  - The scale of adjustment has increased relative to the 2008-2010 correction (which was close to 0.6).
- Exchange rate regime tests:
  - Sample splits between de facto pegged regimes and non-peggers; additional robustness excluding Baltics and Iceland in some specs.
  - Interaction regressions include gap and NFA interacted with peg dummy.

### Adjustment mechanisms: real exchange rate, demand, output
- Regression targets:
  - Change in real exchange rate (log change between 2005-08 average and 2012), change in domestic demand (log change 2007-08 average to 2012), and change in relative output (log change 2007-08 average to 2012).
- Bivariate patterns:
  - Non-peggers: real exchange rates tended to depreciate when current account improved; peggers show opposite sign (relative price changes did not help adjustment).
  - Changes in domestic demand and output are highly correlated with current account improvements: current account improvements typically associated with poorer macroeconomic outcomes (less positive or negative expenditure and output growth).
- Regression evidence:
  - Real exchange rate regressions (Table 4): for non-peggers, stock positions matter more than CAGAP for exchange rate adjustment; for peggers, real exchange rates tended to appreciate for countries with negative CAGAP and negative net external liabilities.
  - Overall, evidence provides limited support for “expenditure switching”; the burden of adjustment was mainly “expenditure reduction.”
- Domestic demand and output (Table 5):
  - CAGAP and pre-crisis NFA explain almost 40 percent of cross-country variation in subsequent demand growth (whole sample).
  - Non-peggers: CAGAP important in explaining demand growth.
  - Peggers: initial NFA is the dominant factor.
  - Link between pre-crisis imbalances and GDP growth is weaker but still important with similar regime differences.

### Policy rates, inflation, fiscal balance, and valuation effects (adjustment channels)
- Policy interest rates (Table 6, Figure 13):
  - Bivariate: countries with negative CAGAP tended to have the largest policy rate reductions.
  - Non-peggers with more negative CAGAP undertook larger cuts in policy rates during the crisis; peggers do not show similar pattern except when Baltics are excluded (reflecting ECB cuts for euro area members).
  - Monetary autonomy (non-peggers) facilitated policy rate cuts that could support real depreciation.
- Inflation (Table 7, Figure 14):
  - Bivariate suggests countries with negative CAGAP reduced inflation.
  - Regression: significant relation between CAGAP and inflation only for peggers (peggers with more negative CAGAP experienced reduction in inflation rates relative to pre-crisis levels).
  - Despite lower inflation among peggers with negative CAGAP, no systematic relation between CAGAP and real exchange rate for peggers (offsetting movements in trade-weighted exchange rates or high pre-crisis inflation in some like the Baltics).
- Structural fiscal balance (Table 8, Figure 15):
  - Virtually no correlation between pre-crisis imbalances and subsequent changes in structural fiscal balance.
  - Regression analysis confirms changes in structural balance appear uncorrelated with both CAGAP and pre-crisis NFA.
- Valuation and other stock-flow adjustments (SFA; Figure 16, Table 9):
  - Accounting identity: change in NFA = -current account + valuation and other adjustments + residuals (SFA defined as change in NFA minus financial account and adjusted flows).
  - Bivariate: countries with more negative CAGAP tended to experience net gains on their net external position via non-flow adjustments.
  - Regression evidence:
    - For non-peggers, SFA term moved in a stabilizing direction: countries with most negative CAGAP experienced more positive SFA terms.
    - For peggers, no robust stabilizing pattern; some evidence of destabilizing SFA vis-à-vis initial NFA, but not robust to excluding Hong Kong (a major financial center).
  - Interpretation: for non-peggers favorable valuation effects may reflect exchange rate depreciation combined with portfolio composition (domestic-currency liabilities, foreign-currency assets), and asset price adjustments (domestic asset value declines reducing foreign claims).
  - For peggers, real exchange rate behavior produced less favorable valuation effects for deficit countries.
- Financial flows composition:
  - Shifts in net debt flows account for the lion share in financial account adjustment; debt category experienced largest pre-crisis inflow surge to high-deficit countries.
- Components of current account adjustment (Figure 17, Table 10):
  - Lion share of changes in current account balances 2005-08 to 2012 accounted for by changes in the balance on goods and services.
  - Changes in income balance are virtually uncorrelated with current account changes; transfers significant only for few remittance-reliant countries.
  - Trade volume regressions:
    - Countries with more negative CAGAP experienced both faster export growth and slower import growth.
    - Scale of import adjustment is twice the scale of export adjustment vis-à-vis the CAGAP term — consistent with “expenditure reduction” mechanism.
    - Specification explains sizable component of cross-country variation in import growth, but only modest share of export growth.
    - Strong positive correlation between import growth and real exchange rate changes; surprisingly, same sign for exports (countries with faster export growth experienced real appreciation), driven by Baltics within peg sample.
    - Export performance post-crisis weakly correlated with pre-crisis imbalances and with post-crisis output and import growth in trading partners — possible role of value chains and geographical distribution of gross vs value-added export linkages.

*Italic: Source: IMF working paper content unit _wp14151 - extracted text provided in the input.*

### CONCLUSIONS

### CONCLUSIONS

### Narrowing of current account imbalances
- The paper documents a significant narrowing of current account global imbalances following the financial crisis of 2008.
- Projections suggest a further compression in current account imbalances in the coming years.
- Despite compression in flows, stock imbalances have continued to expand in relation to domestic GDP and global GDP (as of end-2012).

### Stock positions and group-level net external positions (end-2012)
- Four major creditor groups held roughly comparable stocks of net foreign assets: European surplus countries; emerging Asia including China; Japan; and oil exporters.
- Three debtor groups held a similar absolute level of net external liabilities: European deficit countries; the United States; and the rest of the world.
- Absent large valuation changes favoring debtor countries or a further compression of current account imbalances, stock positions may widen further in coming years.

Key numeric indicators from Table 1 (Net external position (ratio of domestic GDP) 1/):
- Oil exporters: 50.3 55.7
- East Asia: 27.5 26.1
- Europe surplus: 22.4 44.3
- Japan: 50.1 56.8
- US: -14.4 -27.4
- Europe deficit: -45.6 -51.7
- Rest of the world: -23.5 -29.3
- 1/ Net external position excludes gold holdings.

### Cross-country evidence on external adjustment
- Current account balances have generally compressed in a way that narrows pre-crisis gaps.
- Pre-crisis current account gaps and pre-crisis net external positions explain an important part of subsequent cross-country differences in demand growth.
- Real exchange rates moved in a stabilizing direction only for countries without exchange rate pegs, and only to a modest extent.
- External adjustment involved very costly declines in demand in high deficit countries, with dramatic output declines relative to pre-crisis forecasts.

Selected numeric highlights from Tables 3–5:
- Table 3: CA gap coefficient estimates range from -0.76*** to -0.54*** across specifications; NFA/GDP 2004-07 coefficients include -0.02*, -0.04**, and related interactions (see table).
- Table 4: For real exchange rate changes, CA gap coefficients vary (e.g., 0.46, 0.74*, -0.62***), and NFA/GDP 2004-07 shows coefficients such as 0.05*** and -0.03*** with significant Peg interactions.
- Table 5: Change in domestic demand and output between 2007-2008 and 2012 — CA gap coefficients: 1.69***, 1.51***, 0.79* (domestic demand) and 0.98***, 0.92***, 0.15 (output); NFA/GDP 2004-07 coefficients include 0.04**, 0.01, 0.10*** (domestic demand) and 0.02, 0.00, 0.07*** (output).

Representative output gap and GDP figures from Table 2:
- United States GDP (2012 2013): 16,245 16,800; Output gap 2012: -4.3; 2013: -4.1
- European deficit countries GDP (2012 2013): 8,810 9,091; Output gap 2012: -2.5; 2013: -2.9
- Rest of the world GDP (2012 2013): 15,764 16,155; Output gap 2012: -0.3; 2013: -0.7
- Total debtors GDP (2012 2013): 40,819 42,046; Output gap 2012: -2.4; 2013: -2.6
- China GDP (2012 2013): 8,229 9,181; Output gap 2012: -3.1; 2013: -3.5
- Emerging Asia GDP (2012 2013): 3,951 4,122; Output gap 2012: 0.2; 2013: -0.1
- European Surplus countries GDP (2012 2013): 6,849 7,214; Output gap 2012: -0.5; 2013: -1.3
- Japan GDP (2012 2013): 5,938 4,902; Output gap 2012: -3.1; 2013: -2.1
- Oil exporters GDP (2012 2013): 6,310 6,503; Output gap 2012: 0.9; 2013: 0.6
- Total creditors GDP (2012 2013): 31,276 31,922; Output gap 2012: -1.3; 2013: -1.5
- Note: output gap measure available only for a subset of oil exporters (gap assumed to be zero for the others).

### Monetary policy, exchange rate regimes, and valuation effects
- Monetary policy changes during the crisis are correlated with initial imbalances for countries without an exchange rate peg: countries with excess deficits cut interest rates by more.
- This correlation does not hold for pegged regimes (sample dominated by euro area countries where policy rate changes were common across surplus and deficit countries).
- There is suggestive evidence that valuation changes have been in a “stabilizing” direction, but only for countries without an exchange rate peg. This is consistent with observed exchange rate movements relative to the pre-crisis period and expected asset price changes.

Selected policy-related numeric findings:
- Table 6 (Policy rates): CA gap coefficients include 0.12***, 0.18***, 0.18*** in various specifications; interaction CA gap*peg = -0.17** in one specification.
- Table 7 (Inflation adjustment): CA gap coefficients include 0.10*, 0.03, 0.03 and 0.26***, 0.07, 0.19*** across specifications; CA gap*peg = 0.24*** in one specification. NFA/GDP 2004-07 shows 0.01** in one specification.

### Costs of adjustment and policy implications
- The narrowing of large external imbalances can inflict considerable macroeconomic pain on deficit countries if it requires sharp adjustment over a limited time horizon.
- Countries that lack monetary autonomy are particularly vulnerable to costly adjustment, though not exclusively so.
- From a global perspective, the findings reinforce the case for policy configurations that make adjustment less costly through:
  - Less expenditure compression in deficit countries; and/or
  - Faster demand growth in surplus countries.
- For individual countries, the results motivate examination of preventive policies to curb excessive and persistent deficits.

*Source: CONCLUSIONS (IMF working paper section).*

### 08. Values in parentheses are t-statistics. ICE = Iceland. *** p<0.01, ** p<0.05, * p<0.1.  OLS estimation with

### 08. Values in parentheses are t-statistics. ICE = Iceland. *** p<0.01, ** p<0.05, * p<0.1.  OLS estimation with

### Table 8. Fiscal Adjustment
- Dependent variable: change in general government structural balance as percent of potential GDP between 2005-2008 (average) and 2012.
- Sample excludes Pakistan and Sri Lanka.
- Estimation: OLS with robust standard errors.
- Columns (1)–(4) coefficients and t-statistics:
  - CA gap:
    - (1) -0.04 [-0.71]
    - (2) 0.02 [0.38]
    - (3) -0.08 [-0.61]
    - (4) 0.02 [0.45]
  - CA gap * peg:
    - (3) -0.11 [-0.76]
  - NFA/GDP 2004-07:
    - (1) -0.00 [-0.32]
    - (2) -0.00 [-0.21]
    - (3) -0.00 [-0.42]
    - (4) -0.00 [-0.45]
  - Peg:
    - (4) 0.01 [1.43]
  - Constant:
    - (1) -0.01*** [-3.39]
    - (2) -0.02*** [-4.15]
    - (3) -0.01 [-0.79]
    - (4) -0.02*** [-4.08]
- Observations:
  - (1) 62
  - (2) 40
  - (3) 22
  - (4) 62
- R-squared:
  - (1) 0.01
  - (2) 0.00
  - (3) 0.03
  - (4) 0.06
- Countries samples:
  - (1) All
  - (2) No Peg
  - (3) Peg
  - (4) Peg, All

### Table 9. Net International Investment Position: Stock-Flow Adjustment 2008-2012
- Dependent variable: cumulative NIIP stock flow adjustment during 2008-2012.
- Sample excludes Iceland and Ireland. HK = Hong Kong, POC.
- Estimation: OLS with robust standard errors.
- Columns (1)–(5) coefficients and t-statistics:
  - CA gap:
    - (1) -1.62*** [-3.13]
    - (2) -1.85*** [-3.11]
    - (3) -1.69*** [-2.76]
    - (4) -0.49 [-0.69]
    - (5) 0.24 [0.34]
  - CA gap * peg:
    - (5) 1.65* [1.92]
  - NFA/GDP 2004-07:
    - (1) 0.08 [1.39]
    - (2) 0.07 [1.32]
    - (3) 0.01 [0.42]
    - (4) 0.13** [2.37]
    - (5) -0.01 [-0.16]
  - Peg:
    - (2) 0.13** [2.61]
  - Constant:
    - (1) 0.01 [0.23]
    - (2) -0.03 [-1.17]
    - (3) -0.04* [-1.93]
    - (4) 0.10** [2.33]
    - (5) 0.07 [1.49]
- Observations:
  - (1) 62
  - (2) 62
  - (3) 41
  - (4) 21
  - (5) 20
- R-squared:
  - (1) 0.22
  - (2) 0.36
  - (3) 0.30
  - (4) 0.22
  - (5) 0.00
- Countries samples:
  - (1) All
  - (2) All
  - (3) No Peg
  - (4) Peg
  - (5) Peg, No HK

### Table 10. Trade Adjustment
- Dependent variables: (log) Export growth 2007-08 to 2012 and (log) Import growth 2007-08 to 2012.
- Estimation: OLS with robust standard errors.
- Columns (1)–(6) coefficients and t-statistics:
  - CA gap (exports columns 1–3; imports columns 4–6):
    - (1) -0.19** [-2.49]
    - (2) -0.11 [-1.16]
    - (3) -0.05 [-0.26]
    - (4) 0.33*** [3.09]
    - (5) 0.33** [2.26]
    - (6) 0.60*** [3.14]
  - NFA/GDP 2004-07:
    - (1) 0.00 [0.24]
    - (2) -0.01 [-1.02]
    - (3) 0.03** [2.22]
    - (4) 0.01 [0.99]
    - (5) -0.02*** [-2.75]
    - (6) 0.06*** [3.82]
  - Log change in REER (2005-08 to 2012):
    - (1) 0.07 [1.30]
    - (2) 0.05 [0.90]
    - (3) 0.52** [2.50]
    - (4) 0.21*** [3.82]
    - (5) 0.26*** [3.85]
    - (6) 0.65*** [3.27]
  - Peg:
    - (3) -0.02 [-1.31]
    - (6) -0.06*** [-3.89]
  - Constant:
    - (1) 0.05*** [5.99]
    - (2) 0.05*** [5.12]
    - (3) 0.04*** [3.98]
    - (4) 0.05*** [6.07]
    - (5) 0.04*** [5.94]
    - (6) 0.01 [1.05]
- Observations:
  - Exports (1–3): 64, 42, 22
  - Imports (4–6): 64, 42, 22
- R-squared:
  - (1) 0.08
  - (2) 0.04
  - (3) 0.31
  - (4) 0.50
  - (5) 0.46
  - (6) 0.44
- Country samples indicated: All, No Peg, Peg for both export and import specifications.

### Figures and Notes (selected)
- Figure 1. Global imbalances (in percent of world GDP).
  - Note: see Appendix for definition of country groups.
- Figure 2. Global dispersion of current account balances, 1970-2012.
  - Note: red line depicts the global sum of absolute values of CA balances divided by world GDP. Blue line depicts the median CA/GDP ratio in absolute terms.
- Figure 3. Net foreign asset positions.
  - Note: see Appendix for definition of country groups.
- Figure 4. Dispersion of net foreign asset positions.
  - Source: Lane and Milesi-Ferretti, External Wealth of Nations database.
- Figure 5. Global imbalances: projections.
  - Note: see Appendix for definition of country groups. (WEO projections shown.)
- Regional figures and notes:
  - Figure 6. Current account balances in Latin America (ratio of GDP). Source: World Economic Outlook, April 2014. Oil exporters include Ecuador, Trinidad and Tobago, and Venezuela.
  - Figure 7. Latin America and Caribbean: Net Foreign Assets and their Composition, 1980-2012. Source: Lane and Milesi-Ferretti, External Wealth of Nations database.
  - Figure 8. Net Foreign Asset Position, Central America and the Caribbean (in percent of regional GDP). Source: Lane and Milesi-Ferretti, External Wealth of Nations database.
  - Figure 9. Latin America and Caribbean: actual and projected net foreign asset position (in percent of regional GDP).
    - Note: shaded area reports projections of the net foreign asset position (NFA) based on the current account projections reported in the Spring 2014 World Economic Outlook. The projections assume that NFA(t+1)=NFA(t)+CA(t+1), with all variables expressed in current US dollars. Oil exporters include Ecuador, Trinidad and Tobago, and Venezuela.
- Country-scatter figures relating changes in CA balance to:
  - CA gap (Figure 10), real exchange rate changes (Figures 11a and 11b), real domestic demand and real GDP changes (Figures 12a and 12b), policy rate adjustment (Figure 13), inflation adjustment (Figure 14), fiscal adjustment (Figure 15), and stock-flow adjustment (Figure 16).
  - Notes specify axis definitions and sample exclusions where applicable (e.g., Figure 13 excludes Serbia; Figure 16 excludes Iceland and Ireland).
- Figure 17. Decomposition of changes in current account balance, 2005-08 to 2012 (ratio of GDP).
  - Source: authors’ calculations based on World Economic Outlook, April 2014.
  - Components displayed include Transfers, Balance of goods and services, Income, Current account for selected countries (Ireland, Chile, Guatemala).

*https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14151.pdf*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14151.pdf_