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The IMF was established in 1944 in part to \"give confidence\" to member countries by providing short-term credits. Although the intention was that the availability of the Fund's resources should prevent countries from experiencing financial crises, in practice the institution often has found itself helping its members cope with crises after they occur. This paper examines how the role of the IMF as crisis manager has evolved over time, from its earliest loans to the exchange crisis that hit Mexico in December 1994. It argues that the defining moment for this role was the international debt crisis of 1982.

The sustained rise in US current account deficits, the stubborn decline in long-run real rates, and the rise in US assets in global portfolios appear as anomalies from the perspective of conventional models. This paper rationalizes these facts as an equilibrium outcome when different regions of the world differ in their capacity to generate financial assets from real investments. Extensions of the basic model generate exchange rate and foreign direct investment excess returns broadly consistent with the recent trends in these variables. The framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.

This article explores the effect of news shocks in open economies using worldwide giant oil and gas discoveries as a directly observable measure of news shocks about future output—the delay between a discovery and production is on average four to six years. We first analyze the effects of a discovery in a two-sector small open economy model with a resource sector. We then estimate the effects of giant oil and gas discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil or gas discovery, the current account and saving rate decline for the first five years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, whereas GDP does not increase until after five years. Employment rates fall slightly and remain low for a sustained period.

This paper examines the relationship between financial regulation and the current account in an intertemporal model of the current account where financial regulation affects the current account through liquidity constraints. Greater liquidity constraints decrease the size and persistence of the current account response to a net output shock. The theory is tested with an interacted panel VAR model where the coefficients are allowed to vary with the degree of financial regulation. The current account reaction to an output shock is 60% larger and substantially more persistent in a country with low financial regulation than in one with high financial regulation.

We undertake a quantitative analysis of the dispersion of current accounts in an open economy version of incomplete insurance model, incorporating important market frictions in trade and financial flows. Calibrated with conventional parameter values, the stochastic stationary equilibrium of the model with limited borrowing can account for about two-thirds of the global dispersion of current accounts. The easing of financial frictions can explain nearly all changes in the current account dispersion in the past four decades whereas the easing of trade frictions has almost no impact on the current account dispersion.

We investigate whether the determinants of current account balances changed in the run-up to the 2009 financial crisis. Although changes in the budget balance appear to be an important factor for advanced current account deficit countries such as the USA, the effect of the 'saving glut variables', that is financial development and openness and legal development, has been relatively stable for emerging market countries, suggesting that those factors cannot explain the bulk of current account movements in recent years. We also find a structural break in current account behavior in 2006-8, in emerging market economies in particular, and attribute the anomalous behavior of precrisis current account balances to financial exuberance as opposed to the nature of the fiscal and monetary policy stance. Our projections suggest that absent drastic policy changes, the imbalances of the USA and China are unlikely to disappear.

The article argues that the economic imbalances that caused the present crisis should be thought of as the outcome of the interaction of the effects of financial deregulation with the macroeconomic effects of rising inequality. In this sense rising inequality should be regarded as a root cause of the present crisis. I identify four channels by which it has contributed to the crisis. First, rising inequality creates a downwards pressure on aggregate demand since poorer income groups have high marginal propensities to consume. Second, international financial deregulation has allowed countries to run larger current account deficits and for longer time periods. Thus, in reaction to potentially stagnant demand, two growth models have emerged: a debt-led model and an export-led model. Third, (in the debt-led growth models) higher inequality has led to higher household debt as working-class families have tried to keep up with social consumption norms despite stagnating or falling real wages. Fourth, rising inequality has increased the propensity to speculate as richer households tend to hold riskier financial assets than other groups. The rise of hedge funds and of subprime derivatives in particular has been linked to rise of the super-rich.

The paper presents empirical evidence on the relationship between current account and fiscal balance for Portugal, Ireland, Italy, Greece, and Spain during the last two decades, by applying a threshold autoregressive methodology initially developed by Enders and Siklos (Journal of Business and Economic Statistics, 19(2), 166–176, 2001) and further developed by Sun (Forest Policy and Economics, 13(6), 479–487, 2011). Our empirical findings show that, first, the relationship between current account and budget balance is characterized by non-linearities, and there is evidence of an asymmetric adjustment within the framework of a long-term cointegration relationship. Second, in the long run, a restrictive fiscal policy is the proper tool for improving the current account balance and the growth prospect for all countries under consideration. Third, in the short run, the adjustment process after a shock takes place, primarily, through the level of the current account, while the budget balance evolves more independently, thus acting as the exogenous variable.

We develop a three-country, stock-flow-consistent macroeconomic model to study the effects of changes in both personal and functional income distribution on national current account balances. The model is calibrated for the USA, Germany and China. Simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the USA since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and institutions. On the other hand, the weak domestic demand and increasing current account balances of Germany and China since the mid-1990s are strongly related to shifts in the functional income distribution at the expense of the household sector.

Domestic factors, such as credit and preference shocks, can explain the negative correlation between house prices and the current account in the U.S. and several other countries before the recent crisis. These shocks, however, cannot account for the fall of world real interest rates observed in the data. Expansionary monetary policy shocks in the U.S., coupled with exchange rate pegs to the dollar in emerging economies, are crucial to understanding the evolution of the real interest rate. Yet, monetary policy factors play virtually no role for house prices and the current account.