Countriess Safety and Competitiveness, and the Estimation of Current Account Misalignments

Abstract

Current account imbalances and their sustainability are among the most debated international policy issues. Through the recently designed External Balance Assessment methodology (EBA), the IMF estimates the impact of several countries’ fundamentals and policies on their current account balance, calculates misalignments in their current account position and indicates policy recommendations which, if implemented, should contribute to reducing these imbalances.In this paper, we explore some extensions to the EBA, following two courses. First, we distinguish in current account regressions between countries that are considered safe investment destinations and non-safe economies. Since this distinction is likely to acquire special relevance in periods of global turmoil, we also distinguish between periods of global stress and tranquil times. Second, we embed in EBA regressions variables that drive countries’ external competitiveness.Results show that current account dynamics may be affected by competitiveness factors and differ significantly between safe and non-safe economies, with such differences becoming particularly relevant in turbulent times. These findings suggest that EBA regressions may be overlooking the influence of countries’ safety and competitiveness on external balances. Our alternative misalignment estimations show larger imbalances than those calculated with the EBA for some Asian economies and smaller imbalances for some high-surplus EU countries.