The Current Account Income Balance: External Adjustment Channel or Vulnerability Amplifier?

May 27, 2022

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Format: Chicago

Alberto Behar, and Ramin Hassan. The Current Account Income Balance: External Adjustment Channel or Vulnerability Amplifier?, (USA: International Monetary Fund, 2022) accessed November 8, 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

In terms of size, the net income balance (IB) is comparable to the trade balance (TB) for many countries. Yet the role of the IB in mitigating external vulnerabilities or complicating external adjustment remains underexplored. This paper studies the role of the IB in stabilizing or destabilizing the current account over the cycle and in crises. Our results show that, due to a negative correlation with the TB, the IB significantly dampens the time series volatility of the current account for most countries. However, the IB generally does not improve during crisis episodes, so current account adjustment occurs entirely through improvements in the TB. The paper also estimates IB semi-elasticities with respect to the exchange rate (ER). Semi-elasticities are small for most countries, so the IB is generally not a significant channel through which the ER stabilizes the current account, and trade-based semi-elasticities are, with some important exceptions, good proxies for current account semi-elasticities used in external sector assessments.

Subject: Balance of payments, Credit, Current account, Exchange rates, Financial crises, Foreign exchange, Income, Money, National accounts

Keywords: B. estimation methodology, Credit, Crisis, Current account, Current account adjustment, D. estimation procedure, Exchange rate elasticity, Exchange rates, Fixed-effects counterfactual estimators, Global, Global imbalances, Income, Income balance, Sudden stop

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/106
Stock No:

WPIEA2022106
ISBN:

9798400207488
ISSN:

1018-5941

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