External Balance in Low Income Countries

53 Pages Posted: 20 Oct 2009

See all articles by Thierry Tressel

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Lone Engbo Christiansen

affiliation not provided to SSRN

Alessandro Prati

International Monetary Fund (IMF) - Research Department, Deceased

Luca Antonio Ricci

affiliation not provided to SSRN

Date Written: October 2009

Abstract

This paper offers a coherent empirical analysis of the determinants of the real exchange rate, the current account, and the net foreign assets position in low income countries. The paper focuses on indicators specific to low income countries, such as the quality of policies and institutions, the special access to official external financing, and the role of shocks. In addition to more standard factors, we find that domestic financial liberalization is associated with higher current account balances and net foreign asset positions, while capital account liberalization is associated with lower current account balances and net foreign asset positions and with more appreciated real exchange rates. Negative exogenous shocks tend to raise (reduce) the current account in countries with closed (opened) capital accounts. Finally, foreign aid is progressively absorbed over time through net imports, and is associated with a more depreciated real exchange rate in the long-run.

Keywords: Capital account, Capital flows, Cross country analysis, Current account, External financing, External shocks, Financial assets, Foreign investment, Low-income developing countries, Real effective exchange rates, Terms of trade, Time series

Suggested Citation

Tressel, Thierry and Christiansen, Lone Engbo and Prati, Alessandro and Ricci, Luca Antonio, External Balance in Low Income Countries (October 2009). IMF Working Papers, Vol. , pp. 1-52, 2009. Available at SSRN: https://ssrn.com/abstract=1490222

Thierry Tressel (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Lone Engbo Christiansen

affiliation not provided to SSRN

No Address Available

Alessandro Prati

International Monetary Fund (IMF) - Research Department, Deceased ( email )

Luca Antonio Ricci

affiliation not provided to SSRN

No Address Available

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