What Shapes Current Account Adjustment During Recessions?

July 30, 2021

Preview Citation

Format: Chicago

Christina Kolerus. What Shapes Current Account Adjustment During Recessions?, (USA: International Monetary Fund, 2021) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper studies the dynamics of external accounts during 278 economic recession events in the past 60 years and sheds light on key factors that shape these patterns. Economic recessions trigger highly-persistent increases in the current account, driven by an initial, sharp decline in investment and fueled by medium term deleveraging, more so in advanced economies than in emerging markets. The strengthening of the current account is more pronounced when internal and external imbalances are present, and less when recessions are synchronized across countries. During severe natural disasters or epidemics, however, current accounts tend to weaken in the short term. Consistent with these findings, the COVID-19 shock, with comparatively moderate pre-existing imbalances yet high synchronization, had a muted effect on current account balances. The compositional changes, however, were unique and driven by unprecedented policy intervention, with record public dissaving more than offsetting exceptional private saving.

Subject: Balance of payments, Credit booms, Current account, Economic growth, Economic recession, Environment, Money, National accounts, Natural disasters, Private savings

Keywords: Credit booms, Current account, Current account response, Current account sensitivity, Economic recession, Global, Natural disasters, Non-commodity EMs, Private savings, Response to recession, Synchronized recession

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/198
Stock No:

WPIEA2021198
ISBN:

9781513584706
ISSN:

1018-5941

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