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External Debts and Current Account Adjustments

The B.E. Journal of Macroeconomics

45 Pages Posted: 4 Feb 2008 Last revised: 28 Jan 2012

Levent Bulut

Ipek University - Department of Economics; Ipek University

Date Written: August 31, 2011


We empirically investigate the effect of net external debt positions on the size of medium-term current account balances. We utilize an approach where net external debt positions dampen the widening of the current account balances. In a simple accounting framework, we find supportive evidence of the adjustment role of the net external debt positions on the current account balances. Our findings show that net external debt holdings affect current account imbalances through their effect on private consumption. Government expenditure and Domestic Investment, on the other hand, are not negatively affected by net external debt holdings. We show that, on average, developing countries in the sample would have run 2.703 percentage point wider current account deficit in the absence of the negative impact of net external debts. Net external debt positions, therefore, reduce the dispersions of current account imbalances, thus, increase the correlation of investment and saving ratios.

Keywords: External Debt Holding, Feldstein-Horioka Puzzle, Current Account Adjustments, Capital Mobility

JEL Classification: E21, F32, F41

Suggested Citation

Bulut, Levent, External Debts and Current Account Adjustments (August 31, 2011). The B.E. Journal of Macroeconomics. Available at SSRN: or

Levent Bulut (Contact Author)

Ipek University - Department of Economics ( email )

Ipek University
Turan Gunes Bulvari
Ankara, 06550

Ipek University ( email )

Turan Güneş Blv
Ankara, 06550

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