Current Account Adjustment in Industrialized Countries

By Caroline Freund. 2000

134 citations recorded by the source corpus.

This paper examines the dynamics of current account adjustment among industrialized countries. We identify twenty-five episodes in which a large sustained improvement in the current account occurred between 1980 and 1997. We find that a typical current account reversal begins when the current account deficit is about 5 percent of GDP, and that it is associated with slowing income growth and a 10-20 percent real depreciation. Real export growth, declining investment, and an eventual leveling off in both the net international investment position and the budget deficit-GDP ratio are also likely to be part of the adjustment. These results suggest that current account reversals in industrialized countries are largely a function of the business cycle.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/a758bdf9a357aacfa83ae023daa02f0191446fec

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Citations in the corpus

2009 Estimates of Fundamental Equilibrium Exchange Rates (2009, background): “For industrial countries, Freund (2000) found that reversals of deficits tend to begin at a threshold of 5 percent of GDP and involve a slowdown in growth in the adjustment period.”
On the Consequences of Sudden Stops (2004, background): “For an analysis of current account reversals among member countries of the Orga- nization for Economic Cooperation and Development (OECD), see Freund (2000). level of borrowing or lending required to maximize intertemporal utility.”
Exchange Rate Management and Crisis Susceptibility: A Reassessment (2014, unknown): “250 Notes: Dependent variable is bank foreign liabilities to GDP (in percent).”
Will the Bretton Woods 2 regime unravel soon? the risk of a hard landing in 2005-2006 (2005, background): “For earlier studies of the determinants and sustainability of the U.S. current account deficit, see Godley (1995, 1999), Mann (1999, 2003), Obstfeld and Rogoff (2000) and Freund (2000).”
Current account determinants and external sustainability in periods of structural change (2011, unknown): “…reads as: SP Y ¼ f Y N Y N ;REER; SG IG Y ; IP Y ;CRP;RIR;DEM;VOL ð3bÞ Relative real GDP per capita represents an important factor in explaining current account developments (e.g. see Freund 2000), linking the intertemporal approach to the current account and the stages of development hypothesis.”
The US as a Net Debtor: The Sustainability of the US External Imbalances (2004, background): “current account deficit, see Mann (1999, 2003) and Freund (2000). See also the materials in Roubini’s Global Macro site section on the U.S. current account sustainability: http://www.stern.nyu.edu/globalmacro/cur_policy/cad.html. 7 Summers (2004).”
A Framework for Assessing Global Imbalances (2008, unknown): “Various authors, starting with Milesi-Ferretti and Razin (2000) and Freund (2005), have found that such adjustments have on average been accompanied by a slowdown in real GDP growth and currency depreciations in the defi cit countries.”
Perspectives on the U.S. Current Account Deficit and Sustainability (2002, background): “…(including a monetary policy response, a reduction in income and, in some cases, a real depreciation) that reduce consumption and particularly investment and change the trajectory of the current account and return it to sustainable territory (Mann, 1999; Freund, 2000; Chinn and Prasad, 2000).”