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Current Account Adjustment and Financial Integration

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Author Info
Pascal Towbin () (IUHEID, The Graduate Institute of International and Development Studies, Geneva)
Abstract

The paper investigates whether higher financial integration leads in general to slower current account adjustments. The study estimates theoretically founded trade balance reaction functions for a panel of seventy countries from 1970-2004. The empirical analysis finds that adjustment in integrated economies is slower. Consistent with the presented theory the trade balance of integrated economies is more persistent, responds less strongly to net foreign assets, and is more sensitive to fluctuations in net output. A sufficiently strong response to net foreign assets is also a condition for external sustainability. Under high integration countries appear to stay close to the sustainability limit.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series HEI Working Papers with number 11-2008.

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Date of creation: Nov 2008
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Handle: RePEc:gii:giihei:heiwp11-2008

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Related research
Keywords: current account adjustment; reaction function; financial integration; capital mobility;

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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