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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.
France is not classified among the European deficit countries because it ran current account surpluses uninterruptedly between 1992 and 2004.
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.
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.
We also ran the regressions using the CAGAP-EBA measure and obtained generally similar results.
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.
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.
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.
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.
Given that output and demand are trending variables, we focus on a shorter pre-crisis period, but results for the 2005-08 pre-crisis period are analogous.
Serbia was excluded from the sample in Table 6 as a large outlier.
This is not necessarily true for peggers that maintain binding capital controls.
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.
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.
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.
Results available from the authors.