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In terms of size, the net income balance (IB) is comparable to the trade balance (TB) for many countries. Yet the role of the IB in mitigating external vulnerabilities or complicating external adjustment remains underexplored. This paper studies the role of the IB in stabilizing or destabilizing the current account over the cycle and in crises. Our results show that, due to a negative correlation with the TB, the IB significantly dampens the time series volatility of the current account for most countries. However, the IB generally does not improve during crisis episodes, so current account adjustment occurs entirely through improvements in the TB. The paper also estimates IB semi-elasticities with respect to the exchange rate (ER). Semi-elasticities are small for most countries, so the IB is generally not a significant channel through which the ER stabilizes the current account, and trade-based semi-elasticities are, with some important exceptions, good proxies for current account semi-elasticities used in external sector assessments.

Colombia --- Macroeconomics --- Economics: General --- Exports and Imports --- Foreign Exchange --- Financial Risk Management --- Money and Monetary Policy --- 'Panel Data Models --- Spatio-temporal Models' --- Multiple or Simultaneous Equation Models: Models with Panel Data --- Empirical Studies of Trade --- International Investment --- Long-term Capital Movements --- Remittances --- Current Account Adjustment --- Short-term Capital Movements --- International Lending and Debt Problems --- Foreign Aid --- Open Economy Macroeconomics --- Financial Crises --- International Financial Markets --- Aggregate Factor Income Distribution --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Economic & financial crises & disasters --- Economics of specific sectors --- International economics --- Currency --- Foreign exchange --- Monetary economics --- Income --- National accounts --- Current account --- Balance of payments --- Exchange rates --- Financial crises --- Credit --- Money --- Currency crises --- Informal sector --- Economics --- Panel Data Models --- Spatio-temporal Models