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Determinants of Current Account Deficits in Developing Countries

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Author Info
César Calderón
Alberto Chong
Norman Loayza

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Abstract

The objective of this paper is to provide an exhaustive characterization of the empirical linkage between current account deficits and a broad set of economic variables proposed by the literature. In order to accomplish this task, we complement and extend previous empirical research by (1) using a large and consistent macroeconomic data set on public and private domestic saving, external saving, and other national income variables, (2) focusing on developing economies by drawing on a panel data set consisting of 44 developing countries and annual information for the period 1966-95, (3) adopting a reduced-form approach, instead of holding to a particular structural model, (4) developing a simple econometric model to distinguish between transitory and permanent effects, and (5) employing a class of estimators that controls for the problems of simultaneity and reverse causation. Some of our findings are: (i) current account deficits are moderately persistent, (ii) a rise in domestic output growth generates a larger current account deficit; (iii) transitory increases in either public or private saving have a positive effect on the current account, and, in contrast, their permanent changes have insignificant effects, (iv) temporary shocks that increase the terms of trade or appreciate the real exchange rate are linked with higher current account deficits, but their permanent changes do not have significant effects, and (v) either higher growth rates in industrialized economies or larger international interest rates reduce the current account deficit in developing economies.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 51.

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Date of creation: Nov 1999
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Handle: RePEc:chb:bcchwp:51

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Roberto Duncan, 2003. "The Harberger-Laursen-Metzler Effect Revisited: An Indirect-Utility-Function Approach," Working Papers Central Bank of Chile 250, Central Bank of Chile. [Downloadable!]
  2. Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Thorsten Beck & Ross Levine, 2002. "Stock Markets, Banks, and Growth: Panel Evidence," NBER Working Papers 9082, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Abdur R. Chowdhury, 2003. "Private Savings In Transition Economies: Are There Terms Of Trade Shocks?," William Davidson Institute Working Papers Series 2003-572, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  5. Beck, Thorsten & Levine, Ross, 2001. "Stock markets, banks, and growth : correlation or causality?," Policy Research Working Paper Series 2670, The World Bank. [Downloadable!]
  6. César Calderón & L. Zanforlin & Alberto Chong, 2001. "Are African Current Account Deficits Different? Stylized Facts, Transitory Shocks, and Decomposition Analysis," IMF Working Papers 01/4, International Monetary Fund. [Downloadable!]
  7. Bystedt, Brianne & Brito, Ricardo D., 2008. "Inflation targeting in emerging economies: Panel evidence," Ibmec Working Papers wpe_123, Ibmec Working Paper, Ibmec São Paulo. [Downloadable!]
  8. Hali J. Edison & Ross Levine & Luca Ricci & Torsten Slok, 2002. "International Financial Integration and Economic Growth," NBER Working Papers 9164, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Chowdhury, Abdur R., 2003. "Do asymmetric terms of trade shocks affect private savings in a transition economy?," BOFIT Discussion Papers 3/2003, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  10. Ross Levine & María Carkovic, 2002. "Finance and Growth: New Evidence and Policy Analyses for Chile," Working Papers Central Bank of Chile 157, Central Bank of Chile. [Downloadable!]
  11. Abdur R. Chowdhury, 2003. "Do asymmetric terms of trade shocks affect private savings in a transition economy?," Macroeconomics 0303006, EconWPA. [Downloadable!]
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