terms of trade shocks adjust their CA, with the goal of drawing policy lessons for microstates. The paper makes two main contributions to the policy debate on CA adjustments: It differentiates between microstates and other states, making it possible to draw conclusions specific to smaller economies. It looks at sustained reduction of the CA deficit rather than just abrupt and short-lived fluctuations. The remainder of the paper is structured as follows: After describing the evolution of CAs in microstates ( Section II ), we analyze their unique characteristics
implying a slow pace. Besides the pace of adjustment, the composition of adjustment has been different across countries. For emerging Europe, both import compression and export recovery played a part in CA adjustment ( Figure 3 ). A sudden stop or withdrawal of foreign capital halted financing and choked demand for imports ( Figures 3 and 4a ). At the same time, wage adjustment in the tradable sector and growth in trading partners helped with exports. In EZ periphery, imports contracted, though not as much as in emerging Europe, and exports did not provide