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Current Account Adjustment and Capital Flows


  • We wish to thank Claudio Borio, Tony Richards, Steve Kamin, Camilo Tovar and William White for useful comments on an earlier draft, and Pat McGuire for helpful discussions. Michela Scatigna provided excellent research assistance.

Debelle: Assistant Governor, Financial Markets, Reserve Bank of Australia, 65 Martin Place, NSW 2000, Sydney, Australia. Tel: +61 2 9551 8200; Fax: +61 2 9551 8000; E-mail: Galati: Head, Monetary Policy and Exchange Rates, Research and Policy Analysis, Monetary and Economic Department, Bank for International Settlements, Centralbahnplatz 2, 4002 Basel, Switzerland. Tel: +41 61 280 8923; Fax: +41 61 280 9100; E-mail:


We examine episodes of current account adjustment in industrial countries over the past 30 years. We find that they were typically associated with a sizable growth slowdown and a large exchange rate depreciation. There was no discernible change in the nature of capital flows just prior to an adjustment. Hence, adjustments may be responding to the resolution of domestic imbalances rather than being an exogenous event. We show that global developments triggered the adjustment, possibly by triggering the unwinding of the domestic imbalances. Most of the ex post adjustment of the financial account was in private sector flows, primarily by foreign investors.