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Current account norms in natural resource rich and capital scarce economies

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  • Araujo, Juliana D.
  • Li, Bin Grace
  • Poplawski-Ribeiro, Marcos
  • Zanna, Luis-Felipe

Abstract

The permanent income hypothesis implies that frictionless open economies with exhaustible natural resources should save abroad most of their resource windfalls and, therefore, feature current account surpluses. Resource rich developing countries (RRDCs), on the other hand, face substantial development needs and tight external borrowing constraints. By relaxing these constraints and providing a key financing source for public investment, resource windfalls might then be associated with current account deficits or at least low surpluses. In this paper, we develop a neoclassical model with private and public investment and several pervasive features in RRDCs, including absorptive capacity constraints, inefficiencies in investment, borrowing constraints, and capital scarcity. We use the model to study the role of investment and these frictions in shaping the current account dynamics under windfalls. Since consumption and investment decisions are optimal, the model also serves to analyze current account norms (benchmarks). We apply the model to the Economic and Monetary Community of Central Africa and discuss how our results can be used to inform external sustainability analyses in RRDCs.

Suggested Citation

  • Araujo, Juliana D. & Li, Bin Grace & Poplawski-Ribeiro, Marcos & Zanna, Luis-Felipe, 2016. "Current account norms in natural resource rich and capital scarce economies," Journal of Development Economics, Elsevier, vol. 120(C), pages 144-156.
    • Handle: RePEc:eee:deveco:v:120:y:2016:i:c:p:144-156
    DOI: 10.1016/j.jdeveco.2015.10.005
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