Determinants and Costs of Current Account Reversals Under Heterogeneity and Serial Correlation

CAU Kiel Economic Working Paper No. 2007-17

44 Pages Posted: 20 Jul 2007

See all articles by Christian Aßmann

Christian Aßmann

University of Bamberg - Department of Economics

Date Written: July 4, 2007

Abstract

Recent empirical evidence suggests that reversing current account balances imply costly adjustment processes leading to reduced economic growth. Using large panel data sets to analyze determinants and costs of reversals asks for controls of heterogeneity among countries. This paper contributes a Bayesian analysis, which allows a parsimonious yet flexible handling of country specific heterogeneity via random coefficients. Furthermore, the analysis allows for serially correlated errors in order to capture persistence within the employed macroeconomic data. Bayesian specification tests provide evidence in favor of models incorporating heterogeneity and serial correlation. The results suggest that consideration of serial correlation and heterogeneity is necessary to assess correctly the determinants and costs of reversals. Results are checked for robustness against the underlying reversal definition.

Keywords: Current account reversals, Bayesian Analysis, Panel Probit Model, Panel Treatment, Random Parameters, Serial Correlation

JEL Classification: C30, F32, F43, C33, C35

Suggested Citation

Aßmann, Christian, Determinants and Costs of Current Account Reversals Under Heterogeneity and Serial Correlation (July 4, 2007). CAU Kiel Economic Working Paper No. 2007-17, Available at SSRN: https://ssrn.com/abstract=1000891 or http://dx.doi.org/10.2139/ssrn.1000891

Christian Aßmann (Contact Author)

University of Bamberg - Department of Economics ( email )

Bamberg 96045
Germany

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