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Sustainable and Excessive Current Account Deficits

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  • Helmut Reisen

Abstract

Large current account deficits are often assumed to play an important role in the propagation of financial crises in emerging markets in receipt of heavy private capital inflows. This paper reaches some major conclusions. First , the Lawson Doctrine — according to which current account deficits that result from a shift in private-sector behaviour should not be a public policy concern — has been discredited by recent currency crises in Latin America and Asia. Second , it is possible to define the size of current account deficits that should be sustainable in the long run. Third , the intertemporal approach to the current account does not provide a reliable benchmark to define when deficits become “excessive”. Fourth , large external deficits should be resisted if unsustainable currency appreciation, excessive risk-taking in the banking system and a sharp drop in private savings are seen to coincide ... Les déficits de la balance des opérations courantes sont-ils largement responsables de la propagation des crises financières dans les marchés émergents qui reçoivent des flux importants de capitaux privés ? Ce document présente plusieurs résultats de recherche relatifs à ce problème. Premièrement , la doctrine de Lawson — selon laquelle les politiques publiques ne devraient pas se soucier des déficits des comptes courants liés aux comportements incohérents du secteur privé — a été discréditée par les crises monétaires qui ont récemment frappé l’Asie et l’Amérique latine. Deuxièmement , il est possible de préciser quel niveau de déficit des comptes courants est tenable à long terme. Troisièmement , on ne peut se fier à une approche intertemporelle pour définir le seuil à partir duquel les déficits deviennent « excessifs ». Quatrièmement, il faut éviter les déficits extérieurs importants lorsque la monnaie est surévaluée, que le secteur bancaire prend trop de risques et que l’on observe ...

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Springer in its journal Empirica.

Volume (Year): 25 (1998)
Issue (Month): 2 (January)
Pages: 111-131

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Handle: RePEc:kap:empiri:v:25:y:1998:i:2:p:111-131

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Web page: http://www.springerlink.com/link.asp?id=100261

Related research

Keywords: Current account deficits; private capital flows;

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References

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  1. Razin, A., 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," Papers 2-93, Tel Aviv - the Sackler Institute of Economic Studies.
  2. Calvo, Guillermo A., 1987. "On the costs of temporary policy," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 245-261, October.
  3. Fry, M., 1996. "How Foreign Direct Investment in Pacific Asia Improves in Current Account," Papers 96-02, University of Birmingham - International Financial Group.
  4. Reuven Glick & Kenneth Rogoff, 1992. "Global Versus Country-Specific Productivity Shocks and the Current Account," NBER Working Papers 4140, National Bureau of Economic Research, Inc.
  5. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," Research Department Publications 4026, Inter-American Development Bank, Research Department.
  6. Fry, Maxwell J., 1996. "How foreign direct investment in Pacific Asia improves the current account," Journal of Asian Economics, Elsevier, vol. 7(3), pages 459-486.
  7. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  8. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," NBER Working Papers 5437, National Bureau of Economic Research, Inc.
  9. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
  10. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  11. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  12. repec:fth:inadeb:318 is not listed on IDEAS
  13. Landis MacKellar & Helmut Reisen, 1998. "A Simulation Model of Global Pension Investment," OECD Development Centre Working Papers 137, OECD Publishing.
  14. Helmut Reisen, 1996. "Net capital inflows: how much to accept, how much to resist?," Proceedings, Federal Reserve Bank of San Francisco, pages 289-321.
  15. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  16. Maurice Obstfeld & Kenneth Rogoff, 1996. "The Intertemporal Approach to the Current Account," NBER Working Papers 4893, National Bureau of Economic Research, Inc.
  17. Adrian Blundell-Wignall & Frank Browne, 1991. "Macroeconomic Consequences of Financial Liberalisation: A Summary Report," OECD Economics Department Working Papers 98, OECD Publishing.
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Citations

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Cited by:
  1. Andre Cartapanis, 2004. "Le declenchement des crises de change : qu'avons-nous appris depuis dix ans ?," Economie Internationale, CEPII research center, issue 97, pages 5-48.
  2. Deren Unalmis & Ibrahim Unalmis & Derya Filiz Unsal, 2008. "Oil Price Shocks, Macroeconomics Stability and Welfare in a Small Open Economy," Discussion Papers 08/13, Department of Economics, University of York.
  3. Puah, Chin-Hong & Lau, Evan & Tan, Kim Lee, 2006. "Budget-current account deficits nexus in Malaysia," MPRA Paper 37677, University Library of Munich, Germany.
  4. Baharumshah, Ahmad Zubaidi & Lau, Evan & Fountas, Stilianos, 2003. "On the sustainability of current account deficits: evidence from four ASEAN countries," Journal of Asian Economics, Elsevier, vol. 14(3), pages 465-487, June.
  5. Jha, Raghbendra, 2001. "Macroeconomics of Fiscal Policy in Developing Countries," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. Aristovnik, Aleksander, 2006. "The Determinants & Excessiveness of Current Account Deficits in Eastern Europe & the Former Soviet Union," MPRA Paper 483, University Library of Munich, Germany.
  7. repec:wfo:wquart:y:1998:i:4:p:183-190 is not listed on IDEAS
  8. Aleksander Aristovnik, 2007. "Short- And Medium-Term Determinants Of Current Account Balances In Middle East And North Africa Countries," William Davidson Institute Working Papers Series wp862, William Davidson Institute at the University of Michigan.
  9. Karl Whelan, 2013. "Sovereign Default and the Euro," Working Papers 201309, School Of Economics, University College Dublin.
  10. Cartapanis, Andre & Dropsy, Vincent & Mametz, Sophie, 2002. "The Asian Currency Crises: Vulnerability, Contagion, or Unsustainability," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 79-91, February.
  11. Ahmad Zubaidi Baharumshah & Evan Lau & Ahmed M. Khalid, 2005. "Testing Twin Deficits Hypothesis: Using VARs and Variance Decomposition," International Finance 0504001, EconWPA.
  12. Hamizun Ismail & Ahmad Baharumshah, 2008. "Malaysia’s current account deficits: an intertemporal optimization perspective," Empirical Economics, Springer, vol. 35(3), pages 569-590, November.
  13. Aleksander Aristovnik, 2006. "How Excessive are External Imbalances in Selected Transition Countries?," Prague Economic Papers, University of Economics, Prague, vol. 2006(3), pages 243-267.
  14. Helmut Reisen, 1998. "Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance," OECD Development Centre Working Papers 136, OECD Publishing.
  15. Aleksander Aristovnik, 2006. "Current Account Sustainability In Selected Transition Countries," William Davidson Institute Working Papers Series wp844, William Davidson Institute at the University of Michigan.
  16. Aristovnik, Aleksander, 2006. "How sustainable are current account deficits in selected transition economies?," MPRA Paper 485, University Library of Munich, Germany.

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