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Current Account Norms in Natural Resource Rich and Capital Scarce Economies

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  • Juliana Dutra Araujo
  • Grace Bin Li
  • Marcos Poplawski-Ribeiro
  • Luis-Felipe Zanna

Abstract

The permanent income hypothesis implies that frictionless open economies with exhaustible natural resources should save abroad most of their resource windfalls and, therefore, feature current account surpluses. Resource-rich developing countries (RRDCs), on the other hand, face substantial development needs and tight external borrowing constraints. By relaxing these constraints and providing a key financing source for public investment in RRDCs, temporary resource revenues might then be associated with current account deficits, or at least low surpluses. This paper develops a neoclassical model with private and public investment and several frictions that capture pervasive features in RRDCs, including absorptive capacity constraints, inefficiencies in investment, and borrowing constraints that can be relaxed when natural resources lower the country risk premium. The model is used to study the role of investment and these frictions in shaping the current account dynamics under windfalls. Since consumption and investment decisions are optimal, the model also serves to provide current account benchmarks (norms). We apply the model to the Economic and Monetary Community of Central Africa and discuss how our results can be used to inform the current account norm analysis pursued at the International Monetary Fund.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/80.

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Length: 34
Date of creation: 27 Mar 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/80

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Keywords: Current account balances; Central Africa; Natural resources; Developing countries; Private investment; Public investment; Central African Economic and Monetary Community; Economic models; External Sustainability; Developing Economies; current account deficits; current account surpluses; external borrowing; current account dynamics; capital account; current account adjustments; foreign debt; current accounts; external debt; domestic borrowing; external liabilities; debt overhang; highly indebted countries; international borrowing; current account imbalances; domestic debt; debt sustainability; persistent current account deficits; debt relief; capital account openness; excessive � borrowing; debt crises; terms of debt; debt stock; external financing; foreign aid; central bank;

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References

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Cited by:
  1. Jean-Pierre Allegret & Cécile Couharde & Dramane Coulibaly & Valérie Mignon, 2013. "Current accounts and oil price fluctuations in oil-exporting countries: the role of financial development," EconomiX Working Papers 2013-29, University of Paris West - Nanterre la Défense, EconomiX.
  2. Christine J. Richmond & Irene Yackovlev & Shu-Chun S. Yang, 2013. "Investing Volatile Oil Revenues in Capital-Scarce Economies," IMF Working Papers 13/147, International Monetary Fund.
  3. Steven Phillips & Luis Catão & Luca Antonio Ricci & Rudolfs Bems & Mitali Das & Julian di Giovanni & D. Filiz Unsal & Marola Castillo & Jungjin Lee & Jair Rodriguez & Mauricio Vargas, 2013. "The External Balance Assessment (EBA) Methodology," IMF Working Papers 13/272, International Monetary Fund.

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