Financial Regulation and the Current Account

51 Pages Posted: 3 May 2012

See all articles by Sergi Lanau

Sergi Lanau

International Monetary Fund (IMF)

Tomasz Wieladek

Bank of England

Date Written: April 2012

Abstract

This paper examines the relationship between financial regulation and the current account in an intertemporal model of the current account where financial regulation affects the current account through liquidity constraints. Greater liquidity constraints decrease the size and persistence of the current account response to a net output shock. The theory is tested with an interacted panel VAR model where the coefficients are allowed to vary with the degree of financial regulation. The current account reaction to an output shock is 60% larger and substantially more persistent in a country with low financial regulation than in one with high financial regulation.

Keywords: Current account, Economic models, Liquidity controls

Suggested Citation

Lanau, Sergi and Wieladek, Tomasz, Financial Regulation and the Current Account (April 2012). IMF Working Paper No. 12/98, Available at SSRN: https://ssrn.com/abstract=2050271

Sergi Lanau

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Tomasz Wieladek (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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