## What Shapes Current Account Adjustment During Recessions?

_IMF Working Papers, July 30, 2021_

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## Bibliographic details
- Authors: Christina Kolerus
- Published: July 30, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513584706.001

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### Summary
- Study of external account dynamics during 278 economic recession events in the past 60 years.
- Economic recessions trigger highly-persistent increases in the current account.
- The initial driver of current account strengthening is a sharp decline in investment, followed by medium term deleveraging.
- Effects are stronger in advanced economies than in emerging markets.
- Strengthening of the current account is more pronounced when internal and external imbalances are present, and less pronounced when recessions are synchronized across countries.
- During severe natural disasters or epidemics, current accounts tend to weaken in the short term.
- The COVID-19 shock, characterized by comparatively moderate pre-existing imbalances yet high synchronization, had a muted effect on current account balances.
- Compositional changes during COVID-19 were unique: record public dissaving more than offset exceptional private saving.

### Key findings and patterns
- Sample and scope:
  - 278 economic recession events over the past 60 years.
- Main dynamics:
  - Highly-persistent increases in the current account following recessions.
  - Initial, sharp decline in investment is the primary immediate channel.
  - Medium term deleveraging fuels continued current account strengthening.
- Cross-country and event heterogeneity:
  - Stronger adjustment in advanced economies than in emerging markets.
  - Larger current account strengthening when internal and external imbalances exist.
  - Smaller strengthening when recessions are synchronized across countries.
  - Short-term weakening of current accounts during severe natural disasters or epidemics.

### Mechanisms and compositional changes
- Investment channel:
  - Sharp decline in investment at recession onset drives immediate current account improvement.
- Deleveraging channel:
  - Medium term deleveraging sustains current account strengthening.
- Policy and sectoral composition (COVID-19 example):
  - COVID-19 featured unique compositional changes driven by unprecedented policy intervention.
  - Record public dissaving during COVID-19 more than offset exceptional private saving.

### Implications and interpretation
- The presence of pre-existing imbalances amplifies current account strengthening during recessions.
- High synchronization of recessions across countries dampens current account adjustment.
- Natural disasters and epidemics can reverse typical recession-driven current account improvements in the short term.
- Policy responses (public dissaving) can markedly alter the usual private-sector driven compositional shifts in external accounts.

*Source: What Shapes Current Account Adjustment During Recessions? (IMF Working Paper by Christina Kolerus, July 30, 2021).*

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_Source: https://www.imf.org/en/publications/wp/issues/2021/07/30/what-shapes-current-account-adjustment-during-recessions-462366_