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Current Account Deficits, Macroeconomic Policy Stance and Governance: An Empirical Investigation

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  • Erdal Özmen

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    (Department of Economics, METU)

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    Abstract

    This paper empirically investigates the effects of institutional and macroeconomic policy stance variables on current account deficits (CAD). Based on cross-section data for a broad number of developing and industrial countries, the results strongly suggest that better governance increases whilst the presence of original sin decreases the ability of an economy to sustain CAD. Exchange rate flexibility and openness appear to put a discipline on CAD. Consistent with the equity home bias and Feldstein-Horioka puzzle, CAD decrease with country size. The net impacts of the financial deepening and monetary credibility on CAD are found to be insignificant.

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    File URL: http://www.erc.metu.edu.tr/menu/series04/0414.pdf
    File Function: First version, 2004
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    Bibliographic Info

    Paper provided by ERC - Economic Research Center, Middle East Technical University in its series ERC Working Papers with number 0414.

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    Length: 11 pages
    Date of creation: Oct 2004
    Date of revision: Oct 2004
    Handle: RePEc:met:wpaper:0414

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    Keywords: Current Account; Exchange Rate Regimes; Original Sin;

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    6. repec:rus:hseeco:181565 is not listed on IDEAS
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    14. Jerry Coakley & Ana-Maria Fuertes & Fabio Spagnolo, 2004. "Is the Feldstein-Horioka Puzzle History?," Manchester School, University of Manchester, vol. 72(5), pages 569-590, 09.
    15. Hausmann, Ricardo & Panizza, Ugo, 2003. "On the determinants of Original Sin: an empirical investigation," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 957-990, December.
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    17. Olivier Blanchard & Francesco Giavazzi, 2002. "Current Account Deficits in the Euro Area: The End of the Feldstein Horioka Puzzle?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 147-210.
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