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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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    1. Calderon Cesar Augusto & Chong Alberto & Loayza Norman V., 2002. "Determinants of Current Account Deficits in Developing Countries," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 2(1), pages 1-33, March.
    2. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc.
    3. repec:rus:hseeco:181565 is not listed on IDEAS
    4. Milesi-Ferretti, G-M & Razin, A, 1996. "Current-Account Sustainability," Princeton Studies in International Economics, International Economics Section, Departement of Economics Princeton University, 81, International Economics Section, Departement of Economics Princeton University,.
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    7. Taylor, Alan M., 2002. "A century of current account dynamics," Journal of International Money and Finance, Elsevier, Elsevier, vol. 21(6), pages 725-748, November.
    8. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
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    11. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
    12. Obstfeld, Maurice, 2004. "Globalization, Macroeconomic Performance, and the Exchange Rates of Emerging Economies," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt7q670769, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    13. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
    14. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
    15. James M. Nason & John H. Rogers, 2003. "The present-value model of the current account has been rejected: Round up the usual suspects," Working Paper, Federal Reserve Bank of Atlanta 2003-7, Federal Reserve Bank of Atlanta.
    16. Hausmann, Ricardo & Panizza, Ugo, 2003. "On the determinants of Original Sin: an empirical investigation," Journal of International Money and Finance, Elsevier, Elsevier, vol. 22(7), pages 957-990, December.
    17. 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.
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    19. 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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