Sharp Reductions in Current Account Deficits: An Empirical Analysis

17 Pages Posted: 15 Feb 2006

See all articles by Gian Maria Milesi-Ferretti

Gian Maria Milesi-Ferretti

International Monetary Fund (IMF); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: December 1997

Abstract

The paper studies determinants and consequences of sharp reductions in current account imbalances (reversals) in low- and middle-income countries. It poses two questions: what triggers reversals, and what factors explain how costly reversals are? It finds that both domestic variables, such as the current account balance, openness to trade, and the level of reserves, and external variables, such as terms of trade shocks, U.S. real interest rates, and growth in industrial countries, seem to play important roles in explaining reversals in current account imbalances. It also finds some evidence that countries with a less appreciated real exchange rate, higher investment, and more openness before the reversal tend to grow faster after a reversal occurs.

Keywords: Current account deficits, current account sustainability, capital flows

JEL Classification: F32, F34

Suggested Citation

Milesi-Ferretti, Gian Maria and Razin, Assaf, Sharp Reductions in Current Account Deficits: An Empirical Analysis (December 1997). IMF Working Paper, Vol. , pp. 1-17, 1997. Available at SSRN: https://ssrn.com/abstract=883053

Gian Maria Milesi-Ferretti (Contact Author)

International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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United Kingdom

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