cyclically adjusted current strongaccountstrong balances.pdf

Board of Governors of the Federal System International Finance Discussion Papers Number 1126 December 2014 Cyclically Adjusted Current Account Balances Jane Haltmaier Board of Governors of the Federal Reserve System NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comments. References to International Finance Discussion Papers (other than an acknowledgement that the writer has had access to unpublished material) should be cleared with the author or authors. Recent IFDPs are available on the Web at /pubs/ifdp. This paper can be downloaded without charge from Social Science Research Network electronic library at . Cyclically Adjusted Current Account Balances Jane Haltmaier* November 2014 Abstract The Great Financial Crisis coincided with a sizable reduction in global external imbalances, defined as the absolute value of the sum of individual country current account surpluses and deficits relative to global GDP. Although current account balances should not respond to a downturn that is uniform across countries, one that hits countries with current account deficits harder than those with surpluses might result in a decline in the global balance. This paper quantifies the cyclical portion of the current account balance for 35 countries using estimates of the severity of the cycle in each country relative to that of its trading partners in conjunction with three estimates of the sensitivity of the current account balance to changes in the output gap. Two of the estimates are derived from equations linking trade to income and the third is derived from the