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Capital flows & current account deficits in the 1990s: why did Latin America & East Asian countries respond differently?

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  • Angelos A. Antzoulatos

Abstract

The return of private capital to highly indebted less-developed countries (LDCs) in the late 1980s was accompanied by widening current account deficits in the recipient countries, which were primarily attributed to a consumption boom in Latin America and an investment surge in East Asia. Interpreting the return as an increase in the external debt ceiling, the maximum amount that can be borrowed, this paper analyzes and compares the different response of the two regions using the conceptual framework of a borrowing-constrained agent. According to it, an increase in the debt ceiling can reduce precautionary savings, and induce higher demand (and widening current account deficits) even when the borrowing constraint does not bind. Moreover, the increase in demand should be decreasing in the original ceiling. The results from a panel of fourteen Latin American and a panel of eight East Asian countries are consistent with the framework. They also indicate that the different response of the two regions can, to a large extent, be explained by Latin America's lower ceiling prior to the return. Further, the results identify several developments that have not received sufficient attention in the literature and, among other policy implications, suggest that controls on capital inflows may not be effective in preventing a current account deterioration.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9610.

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Date of creation: 1996
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Handle: RePEc:fip:fednrp:9610

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Keywords: Balance of payments ; East Asia ; Capital movements ; Developing countries ; Debts; External ; Latin America;

References

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  1. Reinhart, Carmen & Calvo, Sara, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?”," MPRA Paper 7124, University Library of Munich, Germany.
  2. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
  3. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The “Overborrowing Syndrome”," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
  4. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "The capital inflows problem: Concepts and issues," MPRA Paper 13902, University Library of Munich, Germany.
  5. Thomas Laursen & Juan Jose Fernandez-Ansola, 1995. "Historical Experience with Bond Financing to Developing Countries," IMF Working Papers 95/27, International Monetary Fund.
  6. Chuhan, Punam & Claessens,Constantijn A. & Mamingi, Nlandu, 1993. "Equity and bond flows to Asia and Latin America : the role of global and country factors," Policy Research Working Paper Series 1160, The World Bank.
  7. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," NBER Working Papers 5142, National Bureau of Economic Research, Inc.
  8. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  9. Guillermo A. Calvo, 1988. "Costly Trade Liberalizations: Durable Goods and Capital Mobility," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 461-473, September.
  10. Antzoulatos, Angelos A, 1994. "Credit Rationing and Rational Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 182-202, May.
  11. Reinhart, Carmen & Vegh, Carlos, 1994. "Intertemporal consumption substitution and inflation stabilization:An empirical investigation," MPRA Paper 13427, University Library of Munich, Germany.
  12. Stephen Zeldes, . "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," Rodney L. White Center for Financial Research Working Papers 20-86, Wharton School Rodney L. White Center for Financial Research.
  13. Xu, Xiaonian, 1995. "Precautionary Savings under Liquidity Constraints: A Decomposition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 675-90, August.
  14. repec:imf:imfpdp:9310 is not listed on IDEAS
  15. Liliana Rojas-Suárez & Steven R. Weisbrod, 1995. "Achieving Stability in Latin American Financial Markets in the Presence of Volatile Capital Flows," IDB Publications 6814, Inter-American Development Bank.
  16. Mark M. Spiegel, 1995. "Sterilization of capital inflows through the banking sector: evidence from Asia," Economic Review, Federal Reserve Bank of San Francisco, pages 17-34.
  17. Liliana Rojas-Suárez & Steven R. Weisbrod, 1996. "Building Stability in Latin American Financial Markets," IDB Publications 5921, Inter-American Development Bank.
  18. Reuven Glick & Ramon Moreno, 1994. "Capital flows and monetary policy in East Asia," Pacific Basin Working Paper Series 94-08, Federal Reserve Bank of San Francisco.
  19. Michael P. Dooley & Eduardo Fernandez-Arias & Kenneth M. Kletzer, 1994. "Recent Private Capital Inflows to Developing Countries: Is the Debt Crisis History?," NBER Working Papers 4792, National Bureau of Economic Research, Inc.
  20. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December.
  21. Mas, Ignacio, 1995. "Things Governments Do to Money: A Recent History of Currency Reform Schemes and Scams," Kyklos, Wiley Blackwell, vol. 48(4), pages 483-512.
  22. Carlos A. Végh Gramont & Ratna Sahay & Guillermo Calvo, 1995. "Capital Flows in Central and Eastern Europe," IMF Working Papers 95/57, International Monetary Fund.
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Cited by:
  1. Steven B. Kamin & Paul R. Wood, 1996. "Capital inflows, financial intermediation, and aggregate demand: empirical evidence from Mexico and other Pacific Basin countries," Proceedings, Federal Reserve Bank of San Francisco, pages 356-405.
  2. Soyoung Kim & Sunghyun Henry Kim & Yunjong Wang, 2004. "Macroeconomic Effects of Capital Account Liberalization: the Case of Korea," Review of Development Economics, Wiley Blackwell, vol. 8(4), pages 624-639, November.

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