Patterns of Current Account Adjustment - Insights from Past Experience

Abstract

The paper examines episodes of current account adjustment in individual economies. A central finding is that these episodes are very divergent and can be usefully classified, on the basis of cluster analysis, in three groups. A majority of cases is characterised by internal adjustment, exhibiting slowing domestic demand growth. In some cases, the adjustment was mainly external, facilitated by an exchange rate depreciation but without economic slowdown. Finally, some cases involved a crisis-like combination of a severe slowdown and a significant currency depreciation. Using a multinomial logit, we find that this classification of episodes helps improve the predictability of current account adjustment.