As the current account turns: Disaggregating the effects of current account reversals in industrial countries

Abstract

This paper extends the study of current account (CA) reversals by considering the implications for the composition of output and employment. It is shown that decreases in CA deficits imply increases in tradable relative to non-tradable output and/or declines in investment. The impact of CA 'rebalancing' should therefore be expected to vary considerably across sectors of an economy. This intersectoral variation is studied by examining the dynamics of output, employment and prices using data for 55 sectors of the economy during 14 industrial country reversal episodes. The output and employment declines associated with CA reversals are most clearly evident in investment-related sectors, while sectors related to primary commodities generally perform relatively well following reversals. Reversals are also followed by increases in relative inflation for tradable goods sectors. © 2013 John Wiley & Sons Ltd.