Recessions and external imbalances

Abstract

This paper empirically examines the relationship between growth (and recessions) and current account imbalances at the global and country level. The results suggest that global current account imbalances are strongly pro-cyclical, and that the strong positive correlation between global growth and imbalances is not driven exclusively by major growth slowdowns. We also find that past recessions and financial crises, both country-specific and global ones, tend to be preceded by a building up in current account imbalances and followed by a sharp and persistent adjustment. This pattern is in marked contrast with the increase in global imbalances observed during the COVID-19 crisis.