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Rapid Current Account Adjustments

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  • Patrick A. Imam

Abstract

We describe unique aspects of microstates-they are less diversified, suffer from lumpiness of investment, they are geographically at the periphery and prone to natural disasters, and have less access to capital markets-that may make the current account more vulnerable, penalizing exports and making imports dearer. After reviewing the "old" and "new" view on current account deficits, we attempt to identify policies to help reduce the current account. Probit regressions suggest that microstates are more likely to have large current account adjustments if (i) they are already running large current account deficits; (ii) they run budget surpluses; (iii) the terms of trade improve; (iv) they are less open; and (v) GDP growth declines. Monetary policy, financial development, per capita GDP, and the de jure exchange rate classification matter less. However, changes in the real effective exchange rate do not help drive reductions in the current account deficit in microstates. We explore reasons for this and provide policy implications.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/233.

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Length: 28
Date of creation: 01 Sep 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/233

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Keywords: Current account deficits; External shocks; Development; Gross domestic product; Real effective exchange rates; Economic models; terms of trade; terms of trade shocks; trade shocks; terms of trade shock; trade shock; import prices; trade changes; monetary policy; trading partners; open economies; current account deficit; domestic demand; real wages; political economy; export prices; trade preferences; inflation; foreign currency; preferential trade; domestic market; trade agreements; exchange rate fluctuations; transport costs; preferential trade agreements; importing countries; international trade; domestic savings; commodity prices; export sector; exchange rate policies; external position; imported goods; import duties; preferential agreements; oil-importing countries; importable goods; net exports; domestic prices; effective exchange rates; importing country; wholesale trade; exporting countries; domestic production; imported good; exchange rate regimes; per capita income; current account balance; relative prices; forward market; export earnings; export diversification; import demand; reducing prices; trade barriers; trade deficits; international standards; imported inputs; market segmentation; exchange rate regime;

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Citations

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Cited by:
  1. Patrick A. Imam, 2009. "Introducing the Euro As Legal Tender," IMF Working Papers 09/146, International Monetary Fund.
  2. Patrick Imam, 2012. "Exchange Rate Choices of Microstates," The Developing Economies, Institute of Developing Economies, vol. 50(3), pages 207-235, 09.
  3. Yehenew Endegnanew & Therese Turner-Jones & Charles Amo Yartey, 2012. "Fiscal Policy and the Current Account," IMF Working Papers 12/51, International Monetary Fund.
  4. Paul Cashin & Samya Beidas-Strom, 2011. "Are Middle Eastern Current Account Imbalances Excessive?," IMF Working Papers 11/195, International Monetary Fund.

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