Global Imbalances Adjustment After Crisis, Dispense di Economia Internazionale

Scarica Global Imbalances Adjustment After Crisis e più Dispense in PDF di Economia Internazionale solo su Docsity! WP/14/151 Global Imbalances and External Adjustment after the Crisis Phillip R. Lane and Gian Maria Milesi-Ferretti © 2014 International Monetary Fund WP/14/151 IMF Working Paper Research Department Global Imbalances and External Adjustment after the Crisis Prepared by Phillip R. Lane and Gian Maria Milesi-Ferretti1 August 2014 Abstract This paper has two objectives. First, it reviews the recent dynamics of global imbalances (both “flow” and “stock” imbalances), with a special focus on the shifting position of Latin America in the global distribution. Second, it examines the cross-country variation in external adjustment over 2008-2012. In particular, it shows how pre-crisis external imbalances have strong predictive power for post-crisis macroeconomic outcomes, allowing for variation across different exchange rate regimes. We emphasize that the bulk of external adjustment has taken the form of “expenditure reduction”, with “expenditure switching” only playing a limited role. JEL Classification Numbers:F31, F32 Keywords: Global crisis, Current account adjustment Author’s E-Mail Address: plane@tcd.ie; gmilesiferretti@imf.org 1 Prepared for Central Bank of Chile’s 2013 Annual Research Conference. We thank our discussant Norman Loayza and conference participants for helpful comments, as well as João Nogueira Martins and participants at seminars at the European Commission, George Washington University, the International Monetary Fund, the Monetary Authority of Singapore and the Irish Economic Association Annual Meeting. We thank Rogelio Mercado and Clemens Struck for excellent research assistance. Lane also thanks the Institute for New Economic Thinking for research support. This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. 4 I. INTRODUCTION Over five years have passed since the most intense phase of the global financial crisis. As has been widely documented, the pre-crisis period was characterized by increased dispersion in current account deficits and surpluses, facilitated by a benign global financial environment characterized by low risk aversion by borrowers and lenders as well as low volatility (see, amongst others, Lane 2013). While the crisis was not triggered by an unraveling of global imbalances, it did lead to a drastic change in the global financial environment and a sharp compression of current account balances. But was this initial adjustment the result of cyclical factors, including the initial sharp decline in domestic demand in deficit countries such as the United States, the euro area periphery, and several countries in Central and Eastern Europe, as well as initially declining commodity prices? Or has the external adjustment process been more protracted, with a stronger structural component? In this paper we seek to address these questions by looking both at the adjustment of “global imbalances” post-crisis and at cross-country evidence on the external adjustment process. For the first part, covered in Section II, we illustrate how global current account imbalances have narrowed since the crisis, but how stock imbalances have instead continued to increase. Furthermore, we show that, while the adjustment process has a cyclical component (in the sense that output gaps for deficit countries were estimated to be larger than for surplus countries), global current account imbalances are projected to narrow further in the years ahead. The second part of the paper presents 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”. This part builds on previous work (Lane and Milesi-Ferretti, 2012) which focused on the process of adjustment in the two years following the financial crisis. We believe an extension is warranted for two reasons. First, the longer time period allows us to better incorporate the effects of the crisis in the euro area. Second, and more generally, the longer time period elapsed since the crisis allows us to provide a medium-term analysis of adjustment, which should be less contaminated by purely-cyclical factors. The paper is related to several strands of literature: on current account reversals and sudden stops (e. g. Calvo, 1998; Milesi-Ferretti and Razin, 2000; Calvo et al, 2004); causes and consequences of global imbalances (e. g. Obstfeld and Rogoff, 2005, 2007; Blanchard and Milesi-Ferretti, 2010; Klyuev and Kang, 2013); and the cross-country impact of the global financial crisis (e. g. Rose and Spiegel, 2010, 2012; Frankel and Saravelos, 2012; Lane and Milesi-Ferretti, 2011). Also in relation to these contributions, the longer post-crisis time period provides a clearer perspective on the medium-term dynamics of current account balances and output performance. 5 II. GLOBAL IMBALANCES AFTER THE CRISIS The decade preceding the global financial crisis was characterized by a sharp widening of global imbalances, which was underpinned by a spectacular increase in capital flows and the size of cross-border financial holdings, particularly for advanced economies. During and after the crisis capital flows declined sharply and current account balances contracted. In this section we focus on trends in current account balances and net external positions, first at the global level and subsequently for Latin America more specifically. A. Global trends Figure 1 depicts the evolution of “global imbalances”—current account balances in the main countries/regions of the world. The classification of countries in groups follows Blanchard and Milesi-Ferretti (2010). In particular, European countries (including those in the euro area) with current account surpluses are grouped separately from those with current account deficits. As is well known, the pre-crisis period was associated by a widening U.S. current account deficit as well as growing current account deficits in the “euro area periphery”, the United Kingdom, and Central and Eastern Europe. At the same time, surpluses surged in emerging Asian countries (especially China), the group of major oil exporters and a number of advanced economies in the euro area and northern Europe. As Figure 1 shows, global imbalances peaked in 2007-08 and shrunk sharply in 2009, reflecting a global downturn but also sharply lower oil prices, and, after increasing in 2010 with the recovery in global output and oil prices, they have continued to shrink. What was the country pattern of this adjustment? Among deficit countries, the US deficit shrank by over 1 percent of world GDP during the period 2006-13 (0.7 percent between 2007 and 2013), and current account imbalances in “deficit Europe” shrank by 80 percent (about 0.7 percent of world GDP) between 2007 and 2013. In contrast, 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).2 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), while the surpluses in oil exporters declined modestly and those of other advanced European countries were broadly unchanged. Ancillary evidence on the narrowing of current account imbalances comes from Figure 2. The figure depicts two measures of current account dispersion: one weighted by country size (the sum of the absolute value of current account balances, divided by world GDP) and the other unweighted (the median value of the current account to domestic GDP ratio). Both series show a decline in current account dispersion after the crisis, interrupting a trend starting in the early 1990s. 2 France is not classified among the European deficit countries because it ran current account surpluses uninterruptedly between 1992 and 2004. 6 Does this imply that global imbalances are “over”? A look at international creditor and debtor positions (Figure 3) suggests some caution. As the top panel shows, global creditor and debtor positions have not shrunk as a ratio of GDP—in fact, they have widened since 2007. As of 2012, there were 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. On the other side of the ledger, there were 3 major debtor areas with liabilities of over $4 trillion: the United States, European deficit countries, and the rest of the world. As is the case for current account balances, six countries (Australia, Brazil, Canada, France, India, and Mexico) account for the lion share of the rest of the world’s liabilities. Despite the reduction in flow imbalances, creditor and debtor positions as a share of world GDP increased in absolute terms for all countries and regions depicted in Figure 3. Table 1 reports the positions for these same countries and regions scaled instead by domestic GDP: the only region for which the absolute size of the position relative to GDP has shrunk since 2012 is East Asia (including China), also reflecting the rapid pace of GDP growth. Figure 4 reports alternative measures of dispersion of creditor and debtor positions. Symmetrically with Figure 2, the first measure is weighted by country size (the sum of the absolute value of net foreign asset positions, scaled by world GDP) and the second is unweighted (the median ratio of net foreign assets to domestic GDP). Both measures show a trend towards rising dispersion that was not interrupted by the crisis.3 What is the outlook for imbalances over the medium term? The top panel of Figure 5 shows current account projections from the Spring 2014 edition of the IMF’s World Economic Outlook (IMF 2014). Current account imbalances have continued to shrink in 2013 and are projected to post a further modest decline over the medium term. Current WEO forecasts envisage some widening of surpluses in Asian economies in relation to world GDP (particularly China) over the next five years. However, this is more than offset by a projected shrinking surplus in advanced European countries and especially oil exporters. On the other side, the deficits of other European countries and the rest of the world are both expected to shrink over the next five years, with the U.S. deficit remaining broadly stable. Table 2 provides ancillary evidence on whether the reduction in current account imbalances reflects primarily cyclical or structural factors. It shows estimates of the size of the output gap (also from the World Economic Outlook database) for both surplus and deficit countries. The estimated output gap is negative for both deficit and surplus countries and larger for the former, which would suggest the presence of some cyclical narrowing of current account balances in 2012-13, but the difference in output gaps is relatively modest—as also noted by Klyuev and Kang (2013). 3 The sharp decline in the “unweighted” measure of stock imbalances between 2002 and 2006 reflects primarily the effect of debt forgiveness on the external positions of some highly indebted poor countries, primarily in Africa. 9 empirical literature on this topic, we estimate the medium-term relation between current account balances and a set of macro-financial variables (demographic structure, level of output per capita, output growth rate, the fiscal balance, natural resource endowments, lagged net international investment position, financial center status, past experience of crisis episodes). The “excess” component of current account imbalances is derived as the deviation of the actual current account values from these estimated values. We subsequently will examine whether external adjustment during the crisis can be related to the size of this gap measure. The current account “gap” is measured as the difference between the actual average current account balance during 2005-2008 (the final four-year interval in our pre-crisis sample) and the fitted value from the estimated regression4 The country sample includes 64 advanced economies and emerging markets (listed in the Appendix). In light of various idiosyncratic factors it excludes major oil exporters as well as countries with per capita income in 2007 below $1000 and very small countries (with GDP below $20 billion in 2007).5 Lane and Milesi-Ferretti (2012) show that the model captures much of the cross-country, cross- time variation in current account balances. For instance, there is a strong positive correlation (0.74) between the actual and model-implied values for the current account for the 2005-2008 period just prior to the onset of the global crisis. Still, there remains a substantial residual component and it is this “unexplained” component that we exploit as a proxy for “excessive” pre-crisis imbalances. As a robustness test, we also calculated a measure of the current account gap using the more recent “External Balance Assessment” (EBA) methodology, described in IMF (2013). The EBA relies on a similar panel regression of current account balances, but covers a wider range of explanatory variables with a more explicit emphasis on policy variables. For the purpose of this paper, we construct the pre-crisis “gap” using the residuals from the EBA panel regression, thereby side-stepping the issue of whether the policy variables during that period were at “appropriate” levels. The correlation between the residuals from the EBA regression and the gap measure described earlier is extremely high. In the regression analysis, we use the CAGAP measure, since it is available for a larger sample of countries.6 4 Lane and Milesi-Ferretti (2012) report a host of robustness checks on the quality of the current account gap measure. These included additional regressors and examining alternative time windows in generating the gap estimates.` 5 See Lane and Milesi-Ferretti (2012) for further details on the choice of sample. 6 We also ran the regressions using the CAGAP-EBA measure and obtained generally similar results. 10 We next turn to an examination of whether macroeconomic outcomes during and following the global financial crisis can be related to our measure of the current account gap. As a first step, we look at changes in the current account balance between the 2005-08 period and 2012. As the bivariate scatterplot of Figure 10 highlights, the correlation of the current account gap with the subsequent change in the current account balance is clearly negative and very strong— those countries with the largest negative gaps (pre-crisis current account deficits in excess of the values indicated by the model specification) have experienced the biggest improvements in external balances over the crisis period, while those countries with the largest positive gaps (pre-crisis current account balances in excess of the values indicated by the model specification) have seen the largest declines in their current account to GDP ratio. Hence, the 2008-2012 period can be interpreted as a correction phase, in which the momentum has been towards the elimination of excessive external imbalances. The pattern in Figure 10 is very similar to the relation between the CAGAP measure and current account adjustment over 2008-2010 reported by Lane and Milesi-Ferretti (2012). In fact, there is a very high correlation (0.85) between the 2008-2010 change in the current account and the 2008-2012 change—the persistence of the improvement in the current account suggests that it cannot be just attributed to the acute disruption in international credit markets during the acute phase of the crisis (late 2008 through 2009). We also perform regression analysis, with the change in the current account balance to GDP ratio between 2005-08 and 2012 ( ,0508 12iCA  ) as the dependent variable. In addition to the pre- crisis current account gap, we include the pre-crisis (2007) stock of net foreign assets as a regressor. This allows us to check whether, holding pre-crisis “flow” imbalances constant, “stock” imbalances were also associated with large current account corrections. Accordingly, our baseline regression takes the following form ,0508 12 ,0508 ,0407i i i iCA CAGAP NFA        where ,0407iNFA is the average ratio of NFA to GDP during the period 2004-07. 7 We expect the improvement in the current account balance between 2005-08 and 2012 to be greatest for those countries with the largest negative current account gaps and—potentially—the largest net foreign liability positions.8 7 We also experimented with allowing for regional differences in adjustment behavior. In particular, there is no evidence that the adjustment experience of Latin American countries was different to that found for the wider sample. 8 As illustrated later in the paper, it makes no difference if we look at the change in the balance of goods and services rather than the change in the current account balance as the dependent variable. 11 In addition, we also want to investigate whether the exchange rate regime has influenced the nature of the adjustment process.9 In particular, a baseline hypothesis is that a flexible exchange rate should facilitate external adjustment, since nominal exchange rate movements may more smoothly deliver required shifts in real exchange rates than would be possible under a pegged exchange rate system (or inside a monetary union). We check this hypothesis in two ways. First, we run the baseline specification for sample splits. Specifically, in addition to the full sample of 64 countries, we split the sample between countries with de facto pegged exchange rate regimes and non-pegging countries.10 Furthermore, we also report variations within these sub-samples. Among the peggers, we drop the Baltic states from some specifications, given the dramatic changes in their current account balances. Among the non-peggers, we drop Iceland from some specifications, given the particularly large depreciation associated with the effective shut-down of the Icelandic krona market during its crisis. Second, we also run an expanded specification, in which the current account gap and net foreign asset position are interacted with an exchange rate regime dummy: ,0508 12 ,0508 ,0407 ,0508 ,0407* * i i i i i i i i i CA CAGAP NFA PEG CAGAP PEG NFA PEG                In addition to the analysis of current account adjustment, we also examine the underlying adjustment mechanisms. We focus on the cross-country variation in real exchange movements, relative demand and relative output. That is, we run regressions of the form ,0508 12 ,0508 ,0407 ,0708 12 ,0508 ,0407 ,0708 12 ,0508 ,0407 i i i i i i i i i i i i RER CAGAP NFA DD CAGAP NFA Y CAGAP NFA                               where ,0508 12iRER  is the log change in the real exchange rate between the 2005-08 average and 2012 (a positive movement is a real appreciation), ,0708 12iDD  is the log change in domestic demand between the 2007-08 average and 2012, and ,0708 12iY  is the log change in relative 9 Rose (2014) examines whether there are differences across macroeconomic variables between different exchange rate regimes. However, his primary focus is on “unconditional” differences, whereas we examine the role of the exchange rate regime in conditioning the nature of the adjustment process as a function of the initial pre-crisis current account gap. 10 We employ the exchange rate regime classification system reported in Ghosh et al. (2011). We consider the individual members of the euro area to be de facto peggers. Appendix C shows the list of peggers and non- peggers. 14 how for non-peggers the current account gap plays an important role in explaining subsequent demand growth, while for peggers the initial net foreign asset position is instead the dominant factor. Not surprisingly, the link between pre-crisis imbalances and GDP growth is a bit weaker, but still important, and with the same difference in patterns between non-peggers and peggers. Robustness checks indicate that the current account gap—rather than the pre-crisis current account balance—is the relevant predictor of subsequent output and demand performance. As further robustness checks, Lane and Milesi-Ferretti (2012) reported an array of alternative specifications and found these did not affect the main results. In particular, the pattern of results is robust in extended specifications that incorporate the initial fiscal position and projections of expected future growth or that allow for different coefficients between positive and negative current account gaps. IV. EXTERNAL ADJUSTMENT CHANNELS In Tables 6-8 and Figures 13-15 we explore in more detail some of the channels through which external adjustment can take place, focusing on policy interest rates, inflation, and the fiscal balance during the crisis. Figure 13 shows the bivariate scatter of the change in the policy rate (average value for 2009- 2012 minus the average value for 2005-2008) against the current account gap, in order to check whether those countries with negative pre-crisis current account gaps undertook larger reductions in the policy interest rate, consistent with the need to achieve a real depreciation.12 The covariation pattern is positive—countries with negative current account gaps tended to have the largest policy rate reductions. Table 6 provides multivariate regression analysis. In particular, columns (1)-(4) indicate an important difference in the behavior of policy rates between the non-peg and peg samples. In particular, non-peggers with more negative current account gaps undertook larger cuts in policy interest rates during the crisis, whereas no similar pattern is found among the peggers. Given the strong relation between the current account gap and activity indicators (domestic demand and output) in Table 5, it is not surprising that those countries with monetary policy autonomy (the non-peggers) opted to cut interest rates during the crisis, whereas this option was not available at the individual country level for the peggers.13 Finally, column (6) of Table 6 shows that the result for the peg sample is modified if the Baltics are excluded, with interest rate cuts also enjoyed by peggers with negative current account gaps. Since the euro area member countries dominate the non-Baltic peg sample, this result is explained by the cuts in ECB policy rates during the crisis, since (on an unweighted basis) there are more euro area member 12 Serbia was excluded from the sample in Table 6 as a large outlier. 13 This is not necessarily true for peggers that maintain binding capital controls. 15 countries with negative current account gaps than positive current account gaps. Overall, the evidence in Table 6 can help explain some of the results reported in Table 4—namely, the “stabilizing” (albeit weak) link between pre-crisis imbalances and subsequent changes in the real exchange rate for non-peggers. Table 7 reports regressions for the change in the inflation rate (average value for 2009-2012 minus the average value for 2005-2008), to see if those countries required to improve the external account in part achieved real depreciation through a lower domestic inflation rate. The bivariate scatter is presented in Figure 14, which does suggest that this pattern is evident in the data. However, the regressions reported in Table 7 show a significant relation between the current account gap and inflation only for the pegging sample (columns (4) and (6)). That peggers with more negative initial current account gaps experienced a reduction in inflation rates (relative to precrisis levels) in itself should contribute to real exchange rate adjustment. However, the evidence in Table 4 is that there is no systematic relation between the initial current account gap and the real exchange rate for this sample. For some countries, the positive contribution of the inflation term may have been offset by movements in the trade-weighted exchange rate; for other countries (e.g. the Baltics), the reduction in inflation during the crisis was from a high pre-crisis level, so that the net impact of the inflation differential vis-à-vis trading partners may have remained positive. In Table 8, we examine the relation between pre-crisis imbalances and adjustment in structural fiscal balances, in order to examine whether a tightening in the fiscal stance contributed to the closing of “excessive” current account deficits. We focus on the structural fiscal balance, since this should strip out the impact of cyclical factors on the overall fiscal balance. Figure 15 shows the bivariate scatter, which shows virtually no correlation between pre-crisis imbalances and subsequent changes in the structural fiscal balance. This is confirmed in the regression analysis in Table 8--changes in the structural balance appear uncorrelated with both the pre- crisis current account gap and the pre-crisis net foreign asset position. Next, we investigate whether stock-flow adjustments in net external positions over the period 2008-2012 were correlated with initial external imbalances.14 As discussed in Lane and Milesi- Ferretti (2001, 2007), the evolution of the net international investment position depends not only on the dynamics of the current account balance but also on valuation effects and other adjustments to the international balance sheet. We are specifically interested in examining whether movements in exchange rates and asset prices have been facilitating external adjustment, with countries with excess deficits experiencing net valuation gains and vice versa. In this respect, it is important to note that while net valuation gains improve the external 14 That is, the contribution of non-flow factors to the change in the net international investment position between end-2007 and end-2012. Gourinchas and Rey (2013) provide a review of the literature on valuation effects and external adjustment. 16 position and vice versa, these gains may actually reflect declines in domestic wealth—for example, a fall in domestic asset prices. In terms of accounting, we can write 1 ( ) t t t t t t t t NFA NFA FA X FA CA KA EO        where FA is the financial account balance (equal to minus the sum of the current account balance, the capital account balance KA, and errors and omissions EO) and X is the sum of valuation effects and other adjustments t t tX VAL OTHER  Where VAL captures valuation effects related to exchange rate and asset price changes and the residual term OTHER captures other changes in the net foreign asset position due to reclassification, changes in coverage etc. For most countries, it is not possible to separately capture the VAL and X terms, so we can only examine the overall X term. We also assume that errors and omissions primarily reflect mismeasured financial flows, and hence we use in our empirical analysis the term SFA defined as 1 ( )t t t t tSFA NFA NFA CA KA    Figure 16 summarizes the bivariate relation between the current account gap in 2005-08 and subsequent adjustments in the net external position not due to flows. The relation is positive— on average, countries with more negative current account gaps tended to experience net gains on their net external position. This relation is further investigated in Table 9, which shows the results for the various sample splits.15 The evidence from columns (1)-(3) is that the SFA term has moved in a stabilizing direction for the non-pegging sample but not for the pegging sample. That is, those non- pegging countries with the most negative current account gaps have experienced more positive SFA terms, helping external adjustment (the international investment position improved relative to what net external borrowing would have suggested). Finally, while column (4) indicates the SFA term moves in a destabilizing direction vis-à-vis the initial net foreign asset position for the peg sample, column (5) shows that this result is not robust to the exclusion of Hong Kong (a major financial center).16 15 The sample excludes Iceland and Ireland as extreme outliers. Lane (2012) analyses the behavior of the stock- flow adjustment term in Ireland during the crisis. 16 Measurement error is more likely to be a significant contributor to the SFA term for international financial centers, in view of the high ratios of gross foreign assets and liabilities to GDP. 19 for pegs, a sample dominated by euro area countries where changes in the policy rate were of course common across surplus and deficit countries. Finally, we have provided some suggestive evidence that valuation changes have been in a ‘stabilizing’ direction—but only for countries without an exchange rate peg. This preliminary evidence is consistent with the evidence on exchange rate changes relative to the pre-crisis period and also with the expected pattern of changes in asset prices more generally. We interpret this set of results as providing a new wave of evidence that the narrowing of large external imbalances can inflict considerable macroeconomic pain on deficit countries if it requires a sharp adjustment over a limited time horizon, especially (but not exclusively) for countries that lack monetary autonomy. From a global perspective, it reinforces the case to search for policy configurations that can make the adjustment process less costly (through some combination of less expenditure compression in deficit countries and faster demand growth in surplus countries). For individual countries, it also provides motivation for the examination of preventive policies that may curb excessive and persistent deficits. 20 References Blanchard, Olivier and Gian Maria Milesi-Ferretti, 2010, “Global Imbalances: In Midstream,” in: Reconstructing the World Economy (edited by Il SaKong and Olivier Blanchard), Washington DC: International Monetary Fund. Calvo, Guillermo, 1998, “Capital Flows and Capital Market Crises: The Simple Economics of Sudden Stops,” Journal of Applied Economics 1 (1), pp. 35-54. Calvo, Guillermo, Alejandro Izquierdo, and Luis Mejia, 2004, “On the Empirics of Sudden Stops,” Proceedings, Federal Reserve Bank of San Francisco, June. Catao, Luis and Gian Maria Milesi-Ferretti, 2013, “External Liabilities and Crises,” IMF Working Paper No. 13/113. Frankel, Jeffrey A. and George Saravelos, 2012, “Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008–09 Global Financial Crisis,” Journal of International Economics 87 (2), pp. 216-231. Ghosh, Atish R., Jonathan D. Ostry and Charalambos G. Tsangarides, 2011, “Exchange Rate Regimes and the Stability of the International Monetary System,” International Monetary Fund Occasional Paper No. 270. Gourinchas, Pierre-Olivier and Hélène Rey, 2013, “External Adjustment, Global Imbalances, Valuation Effects,” forthcoming in Handbook of International Economics vol IV, edited by Gita Gopinath, Elhanan Helpman and Kenneth Rogoff, Elsevier. . International Monetary Fund, 2013, “External Balance Assessment (EBA) Methodology: Technical Background,” mimeo, International Monetary Fund. International Monetary Fund, 2014, World Economic Outlook, April. Klyuev, Vladimir and Joong Shik Kang, 2013, “The Mechanics of Global Rebalancing,” mimeo, International Monetary Fund. Lane, Philip R., 2012, “The Dynamics of Ireland’s Net External Position,” Journal of the Statistical and Social Inquiry Society of Ireland XLI, pp. 24-34. Lane, Philip R., 2013, “Financial Globalisation and the Crisis,” Open Economies Review 24(3), pp. 555-580. Lane, Philip R. and Gian Maria Milesi-Ferretti, 2001, “The External Wealth of Nations: Measures of Foreign Assets and Liabilities for Industrial and Developing Countries,” Journal of International Economics 55, pp. 263-294. 21 Lane, Philip R. and Gian Maria Milesi-Ferretti, 2007, “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004,” Journal of International Economics 73, pp. 223-250. Lane, Philip R. and Gian Maria Milesi-Ferretti, 2012, “External Adjustment and the Global Crisis” Journal of International Economics 88 (2), pp. 252-265. Milesi-Ferretti, Gian Maria and Assaf Razin, 2000, “Current Account Reversals and Currency Crises: Empirical Regularities,” in Currency Crises (edited by Paul Krugman), Chicago: University of Chicago Press for NBER. Obstfeld, Maurice and Kenneth Rogoff, (2005), “Global current account imbalances and exchange rate adjustments,” Brookings Papers on Economics Activity 1, 67–146. Obstfeld, Maurice and Kenneth Rogoff (2007), “The Unsustainable U.S. Current Account Position Revisited,” in G7 Current Account Imbalances: Sustainability and Adjustment, edited by R. Clarida, Chicago: University of Chicago Press for NBER. Rose, Andrew R., 2014, “Surprising Similarities: Recent Monetary Regimes of Small Economies,” Journal of International Money and Finance, forthcoming. Rose, Andrew and Mark M. Spiegel, 2010, “Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure,” Pacific Economic Review 15(3), pp. 340-63. Rose, Andrew and Mark M. Spiegel, 2012, “The Causes and Consequences of the 2008 Crisis: Early Warning,” Japan and the World Economy 24(1), pp. 1-16. 24 Table 2. Output gap in surplus and deficit countries GDP in billions USD Output gap 2012 2013 2012 2013 United States 16,245 16,800 -4.3 -4.1 European deficit countries 8,810 9,091 -2.5 -2.9 ROW 15,764 16,155 -0.3 -0.7 Total debtors 40,819 42,046 -2.4 -2.6 China 8,229 9,181 -3.1 -3.5 Emerging Asia 3,951 4,122 0.2 -0.1 European Surplus countries 6,849 7,214 -0.5 -1.3 Japan 5,938 4,902 -3.1 -2.1 oil exporters 6,310 6,503 0.9 0.6 Total creditors 31,276 31,922 -1.3 -1.5 Note: output gap measure available only for a subset of oil exporters (gap assumed to be zero for the others). 25 Table 3. Current Account Adjustment between 2005-2008 and 2012 (1) (2) (3) (4) (5) (6) (7) CA gap -0.76*** -0.63*** -0.79*** -0.54*** -0.76*** -0.63*** -0.54*** [-8.51] [-6.46] [-5.40] [-6.71] [-4.61] [-6.38] [-6.61] CA gap*peg -0.16 -0.22 [-0.91] [-1.25] NFA/GDP 2004-07 -0.02* -0.01 -0.04** -0.01 -0.04** -0.01 -0.01 [-1.91] [-1.07] [-2.78] [-0.97] [-2.66] [-1.06] [-0.95] NFA/GDP*peg -0.03* -0.03* [-1.95] [-1.94] Peg 0.03*** 0.03*** [2.94] [3.12] Constant 0.00 -0.01 0.02** -0.01** 0.02** -0.01 -0.01** [0.89] [-1.44] [2.52] [-2.10] [2.42] [-1.42] [-2.07] Observations 64 42 22 41 19 64 60 R-squared 0.63 0.62 0.76 0.48 0.71 0.75 0.68 Countries All No Peg Peg No Peg; No ICE Peg; No Baltics All All; No ICE; No Baltics Note: Dependent variable is the change in current account to GDP between 2005-2008 (average) and 2012. Values in parentheses are t-statistics. ICE = Iceland. *** p<0.01, ** p<0.05, * p<0.1. OLS estimation with robust standard errors. 26 Table 4. Real Exchange Rate between 2005-2008 and 2012 (1) (2) (3) (4) (5) (6) (7) CA gap 0.46 0.74* -0.62*** 0.28 -0.53*** 0.74* 0.28 [1.29] [1.74] [-8.36] [0.90] [-4.44] [1.72] [0.88] CA gap*peg -1.36*** -0.81** [-3.12] [-2.38] NFA/GDP 2004-07 0.00 0.05*** -0.03*** 0.04*** -0.03*** 0.05*** 0.04*** [0.12] [3.26] [-4.44] [3.26] [-3.72] [3.22] [3.21] NFA/GDP*peg -0.08*** -0.07*** [-4.81] [-4.63] Peg -0.07*** -0.08*** [-3.13] [-3.88] Constant 0.02 0.04* -0.03*** 0.05** -0.03*** 0.04* 0.05** [1.25] [1.92] [-3.56] [2.60] [-3.57] [1.89] [2.57] Observations 64 42 22 41 19 64 60 R-squared 0.05 0.18 0.55 0.07 0.46 0.25 0.19 Countries All No Peg Peg No Peg; No ICE Peg; No Baltics All All; No ICE; No Baltics Note: Dependent variable is the change in real effective exchange rate between 2005-2008 (average) and 2012. Values in parentheses are t-statistics. ICE = Iceland. *** p<0.01, ** p<0.05, * p<0.1. OLS estimation with robust standard errors. 29 Table 7. Inflation Adjustment (1) (2) (3) (4) (5) (6) CA gap 0.10* 0.03 0.03 0.26*** 0.07 0.19*** [1.86] [0.66] [0.72] [3.89] [1.42] [3.35] CA gap*peg 0.24*** [3.07] NFA/GDP 2004- 07 0.01** 0.00 0.00 0.01 0.00 0.00 [2.12] [1.64] [0.95] [1.44] [1.09] [1.19] Peg 0.00 [0.59] Constant -0.01*** -0.01*** -0.01*** -0.01*** -0.01*** -0.01*** [-5.59] [-3.71] [-3.91] [-3.93] [-4.06] [-3.74] Observations 64 64 42 22 41 19 R-squared 0.10 0.17 0.02 0.59 0.03 0.54 Countries All All No Peg Peg No Peg; No ICE Peg; No Baltics Note: Dependent variable refers to the change in inflation between the average for 2009-12 and average for 2005- 08. Values in parentheses are t-statistics. ICE = Iceland. *** p<0.01, ** p<0.05, * p<0.1. OLS estimation with robust standard errors. 30 Table 8. Fiscal Adjustment (1) (2) (3) (4) VARIABLES Change in structural fiscal balance, 2005-08 to 2012 CA gap -0.04 0.02 -0.08 0.02 [-0.71] [0.38] [-0.61] [0.45] CA gap * peg -0.11 [-0.76] NFA/GDP 2004-07 -0.00 -0.00 -0.00 -0.00 [-0.32] [-0.21] [-0.42] [-0.45] Peg 0.01 [1.43] Constant -0.01*** -0.02*** -0.01 -0.02*** [-3.39] [-4.15] [-0.79] [-4.08] Observations 62 40 22 62 R-squared 0.01 0.00 0.03 0.06 Countries All No Peg Peg All Note: Dependent variable is the change in general government structural balance as percent of potential GDP between 2005-2008 (average) and 2012). Sample excludes Pakistan and Sri Lanka for data availability reasons. Values in parentheses are t-statistics. *** p<0.01, ** p<0.05, * p<0.1. OLS estimation with robust standard errors. 31 Table 9. Net International Investment Position: Stock-Flow Adjustment 2008-2012 (1) (2) (3) (4) (5) CA gap -1.62*** -1.85*** -1.69*** -0.49 0.24 [-3.13] [-3.11] [-2.76] [-0.69] [0.34] CA gap*peg 1.65* [1.92] NFA/GDP 2004-07 0.08 0.07 0.01 0.13** -0.01 [1.39] [1.32] [0.42] [2.37] [-0.16] Peg 0.13** [2.61] Constant 0.01 -0.03 -0.04* 0.10** 0.07 [0.23] [-1.17] [-1.93] [2.33] [1.49] Observations 62 62 41 21 20 R-squared 0.22 0.36 0.30 0.22 0.00 Countries All All No Peg Peg Peg, No HK Note: Dependent variable is the cumulative NIIP stock flow adjustment during 2008-2012. Sample excludes Iceland and Ireland. HK = Hong Kong, POC. Values in parentheses are t-statistics. *** p<0.01, ** p<0.05, * p<0.1. OLS estimation with robust standard errors. 34 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. -25 -20 -15 -10 -5 0 5 10 15 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 US JPN Eur surplus CHN EMA OIL ROW Eur deficit Discrepancy Net foreign assets (in percent of world GDP) 0% 10% 20% 30% 40% 50% 60% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Global dispersion of NFA positions Absolute values of world NFA / world GDP Median absolute NFA/GDP 35 Figure 5. Global imbalances: projections Current account Net foreign assets Note: see Appendix for definition of country groups. -3 -2 -1 0 1 2 3 4 2000 2003 2006 2009 2012 2015 2018 Global Imbalances (percent of world GDP) US JPN Eur surplus CHN EMA OIL ROW Eur deficit Discrepancy WEO projections -25 -20 -15 -10 -5 0 5 10 15 20 25 30 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 US JPN Eur surplus CHN EMA OIL ROW Eur deficit Discrepancy WEO projections Net foreign assets (in percent of world GDP) 36 Figure 6. Current account balances in Latin America (ratio of GDP) Note: Sum of current account balances divided by regional GDP. Oil exporters include Ecuador, Trinidad and Tobago, and Venezuela. Source: World Economic Outlook, April 2014. Figure 7. Latin America and Caribbean: Net Foreign Assets and their Composition, 1980-2012 Source: Lane and Milesi-Ferretti, External Wealth of Nations database. -8% -6% -4% -2% 0% 2% 1980 1985 1990 1995 2000 2005 2010 All excl oil exporters -60% -50% -40% -30% -20% -10% 0% 10% 20% 1980 1985 1990 1995 2000 2005 2010 FX Reserves Net derivatives Net debt excl. FX Res Net FDI Net portfolio equity NFA Latin America and Caribbean: net foreign assets (ratio of GDP) 39 Figure 10. Current Account Adjustment and Current Account Gap Note: Vertical axis is change in current account balance (2012 value minus average value for 2005-2008). ARG AUS AUTBEL BRA BLG CAN CHL CHN HKG COL CRI CRO CZE DEN DR ELS EST FIN FRA GER GRE GTM HUN ICE INDIDN IRE ISR ITA JPN KOR LVA LIT MYS MEX MOR NLD NZE NO PAK PER PHLPOL PRT ROM RUS SER SGP SVK SLV SAF ESP SLK SWE SWI TAI THA TUN TUR UKR UK US URU -. 2 -. 1 0 .1 .2 ch a ng e in C A b a la n ce 2 0 05 -0 8 v s. 2 0 12 -.2 -.1 0 .1 .2 current account GAP 2005-08 40 Figure 11a. Real Exchange Rate and Current Account Balance Changes: No Peg Figure 11b. Real Exchange Rate and Current Account Balance Changes: Peg Note: The horizontal axis measures the log change in real effective exchange rate between 2005-08 and 2012, while the vertical axis measures the change in the CA/GDP ratio between 2005-08 and 2012. ARG AUS BRA CAN CHL CHN COL CRI CZE DR GTM HUN ICE INDIDN ISR JPN KOR MYS MEX MOR NZE NOR PAK PER PHLPOL ROM RUS SER SGP SAF SLKSWE SWI THA TUN TUR UKR UK US URU -. 1 -. 05 0 .0 5 .1 .1 5 ch a ng e in C A b a la n ce 2 0 05 -0 8 v s. 2 0 12 -.4 -.2 0 .2 .4 change in RER 2005-08 vs. 2012 AUTBEL BLG HKG CRO DEN ELS EST FIN FRA GER GRE IRE ITA LVA LIT NLD PRT SVK SLV ESP TAI -. 1 0 .1 .2 ch a ng e in C A b a la n ce 2 0 05 -0 8 v s. 2 0 12 -.1 -.05 0 .05 .1 .15 change in RER 2005-08 vs. 2012 41 Figure 12a. Change in Real Domestic Demand and Change in Current Account Balance Note: The horizontal axis measures the log change in real domestic demand between 2007-08 and 2012, while the vertical axis measures the change in the CA/GDP ratio between 2005-08 and 2012. Figure 12b. Change in Real GDP and Change in Current Account Balance Note: The horizontal axis measures the log change in real GDP 2007-08 and 2012, while the vertical axis measures the change in the CA/GDP ratio between 2005-08 and 2012. ARG AUS AUTBEL BRA BLG CAN CHL CHN HKG COL CRI CRO CZE DEN DR ELS EST FIN FRA GER GRE GTM HUN ICE INDIDN IRE ISR ITA JPN KOR LVA LIT MYS MEX MOR NLD NZE NOR PAK PER PHLPOL PRT ROM RUS SER SGP SVK SLV SAF ESP SLKSWE SWI TAI THA TUN TUR UKR UK US URU -. 1 0 .1 .2 ch a ng e in C A b a la n ce 2 0 05 -0 8 v s. 2 0 12 -.4 -.2 0 .2 .4 change in real domestic demand 2007-08 vs. 2012 ARG AUS AUT BEL BRA BLG CAN CHL CHN HKG COL CRI CRO CZE DEN DR ELS EST FIN FRA GER GRE GTM HUN ICE INDIDN IRE ISR ITA JPN KO LVA LIT MYS MEX MOR NLD NZE NO PAK PER PHL POL PRT ROM RUS SER SGP SVKSLV SAF ESP SLK SWE SWI TAI THA TUN TUR UKR UK US URU -. 1 0 .1 .2 .3 ch a ng e in C A b al an ce 2 00 5- 0 8 vs . 2 0 12 -.2 0 .2 .4 change in real GDP 2007-08 vs. 2012