Are Global Imbalances Sustainable? Shedding Further Light on the Causes of Current Account Reversals

28 Pages Posted: 18 Jul 2012

See all articles by Luiz R. de Mello

Luiz R. de Mello

OECD

Pier Carlo Padoan

International Monetary Fund (IMF)

Linda Fache Rousová

European Central Bank (ECB)

Date Written: August 2012

Abstract

Large shifts in countries' external current account positions can be disruptive, often reflecting sudden stops in the flows of external finance and leading to exchange rate and banking crises. As a result, an empirical literature has emerged on the sustainability of, and the determinants of large swings in, current account positions. Further light is shed on this issue by testing for the presence of unit roots in the current account balance‐to‐gross domestic product (GDP) ratios of a large set of mature and emerging‐market economies using a methodology that allows for structural breaks in levels and trends. A chronology is constructed of current account reversals that is consistent with sustainability of external positions and it is used to estimate the factors explaining the likelihood and magnitude of such reversals by utilising a selection model with ordered probit in the selection stage. It is found that most of the factors that explain the probability of reversals, such as trends in capital flows, in the budget balance and in external positions, also influence their magnitude, but there are a few exceptions. For instance, the stance of monetary policy and the magnitude of external imbalances prior to a reversal seem to be more powerful predictors of the probability of reversals than of their magnitude.

Suggested Citation

de Mello, Luiz R. and Padoan, Pier Carlo and Fache Rousová, Linda, Are Global Imbalances Sustainable? Shedding Further Light on the Causes of Current Account Reversals (August 2012). Review of International Economics, Vol. 20, Issue 3, pp. 489-516, 2012, Available at SSRN: https://ssrn.com/abstract=2111750 or http://dx.doi.org/10.1111/j.1467-9396.2012.01035.x

Luiz R. De Mello (Contact Author)

OECD ( email )

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France
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Pier Carlo Padoan

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Linda Fache Rousová

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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