Series: Working Papers. 2012.
Author: Mariam Camarero, María Dolores Gadea-Rivas, Ana Gómez-Loscos and Cecilio Tamarit.
Published in:Journal of Economic Behaviour and Organization. Volume 182, February 2021, Pages 349-362
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Abstract
A decade after the beginning of the Great Recession, flow external imbalances, measured
by the current account (CA) have narrowed markedly. However, stock or net foreign
assets (NFA) imbalances have kept increasing and have created challenges for future
macroeconomic and financial stability. To date, early warning systems (scoreboards) have
focused more on flow than on the stock variables. To approach this problem, in this paper
we analyze expansions using two complementary sets of indicators proposed by Harding
and Pagan (2002) and Gadea et al. (2017). After controlling for a large set of explanatory
variables, we find that the effect of CA imbalances is limited, except when the measures
selected take into account past CA developments or some degree of persistence. In
contrast, the evolution of NFA seems to be much more explanatory of the time it takes
to regain the level of output previous to the recession, as well as the amplitude and the
cumulation of the recoveries. Therefore, we conclude that future macro-prudential policies
should pay more attention to stock variables to measure external imbalances due to their
effects on the characteristics of recoveries.