Determinants of Current Account Deficits in Developing Countries

38 Pages Posted: 20 Apr 2016

See all articles by Norman Loayza

Norman Loayza

World Bank - Research Department

Alberto Chong

University of Ottawa

César A. Calderón

Central Bank of Chile

Date Written: November 30, 1999

Abstract

In developing countries, increases in current account deficits tend to be associated with a rise in domestic output growth and shocks that increase the terms of trade and cause the real exchange rate to appreciate. Higher savings rates, higher growth rates in industrial economies, and higher international interest rates tend to have the opposite effect.

Calderón, Chong, and Loayza examine the empirical links between current account deficits and a broad set of economic variables proposed in the literature.

To accomplish this, they complement and extend previous research by using a large, consistent set of macroeconomic data on public and private domestic savings, external savings, and national income variables; focusing on developing economies by drawing on a panel data set for 44 developing countries and annual information for the period 1966-95; adopting a reduced-form approach rather than holding to a particular structural model; distinguishing between within-country and cross-country effects; and employing a class of estimators that controls for the problems of simultaneity and reverse causation.

Among their findings:

- Current account deficits in developing countries are moderately persistent.

- A rise in domestic output growth generates a larger current account deficit.

- Increases in savings rates have a positive effect on the current account.

- Shocks that increase the terms of trade or cause the real exchange rate to appreciate are linked with higher current account deficits.

- Either higher growth rates in industrial economies or higher international interest rates reduce the current account deficit in developing economies.

This paper - a product of the Regional Studies Program, Latin America and the Caribbean Region - is part of an effort in the region to understand the determinants of external sustainability. The authors may be contacted at crcn@troi.cc.rochester.edu, achong@worldbank.org, or nloayza@condor.bcentral.cl.

Suggested Citation

Loayza, Norman and Chong, Alberto and Calderon, Cesar A., Determinants of Current Account Deficits in Developing Countries (November 30, 1999). World Bank Policy Research Working Paper No. 2398. Available at SSRN: https://ssrn.com/abstract=630771

Norman Loayza (Contact Author)

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Alberto Chong

University of Ottawa ( email )

2292 Edwin Crescent
Ottawa, Ontario K2C 1H7
Canada

Cesar A. Calderon

Central Bank of Chile ( email )

Agustinas 1180
Santiago
Chile

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