Current Account Adjustment and Capital Flows

30 Pages Posted: 20 Sep 2007

See all articles by Gabriele Galati

Gabriele Galati

De Nederlandsche Bank

Guy Debelle

Reserve Bank of Australia

Multiple version iconThere are 2 versions of this paper

Date Written: February 2005


This paper examines episodes of current account adjustment in industrial countries over the past 30 years. We find that they were typically associated with a sizeable slowdown in domestic growth and a large exchange rate depreciation. There was no discernable change in the nature of capital flows in the period just prior to an adjustment, with the possible exception of non-residents' holdings of currency and deposits. This suggests that a current account adjustment may be an endogenous event - responding to the resolution of domestic imbalances - rather than an exogenous event where the size of the current account deficit itself precipitates the adjustment in the domestic economy and the exchange rate. Econometric evidence suggests that global developments trigger the adjustment, possibly because they trigger the unwinding of the domestic imbalances. We find that the bulk of the ex post adjustment of the financial account was in private sector flows, primarily on the part of foreign investors. Finally, we document some notable differences in the adjustment of the current account in the United States in 1987 compared with that observed in the other episodes.

Keywords: International Finance, Current Account Adjustment, Open Economy Macroeconomics

JEL Classification: F3, F32, F41

Suggested Citation

Galati, Gabriele and Debelle, Guy, Current Account Adjustment and Capital Flows (February 2005). BIS Working Paper No. 169, Available at SSRN: or

Gabriele Galati (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB

Guy Debelle

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics