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Current Account Sustainability in Transition Economies

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  • Nouriel Roubini
  • Paul Wachtel

Abstract

This paper presents an analysis of the sustainability of current account deficits in transition economies in Central and Eastern Europe. These countries have experienced large current account imbalances in the transition to a market economy. We consider a wide range of macroeconomic factors that may indicate whether such imbalances are sustainable. We find that capital inflows and the choice of regimes of fixed exchange rates have led to a real exchange rate appreciation in many countries; this in turn has led to a significant loss of competitiveness and a worsening of the current account. In several countries there are a number of other indicators that point to a fragility of the external balance: weak banking and financial systems, large fiscal imbalances, low foreign reserves, increasing foreign debt and foreign debt-burden ratios. However, short-term portfolio investments (so-called hot money' inflows) are still relatively small in the transition economies examined, thus limiting the possibility of sudden speculative capital outflows.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6468.

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Date of creation: Mar 1998
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Publication status: published as Skreb, M. and M. Blejer (eds.) Balance of Payments, Exchange Rates and Competitiveness in Transition Economies. 1999.
Handle: RePEc:nbr:nberwo:6468

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  1. Carlos A. Végh Gramont & Ratna Sahay & Guillermo Calvo, 1995. "Capital Flows in Central and Eastern Europe," IMF Working Papers 95/57, International Monetary Fund.
  2. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  3. Assaf Razin & Gian-Maria Milesi-Ferretti, 1996. "Current Account Sustainability," IMF Working Papers 96/110, International Monetary Fund.
  4. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
  5. Milesi-Ferretti, Gian Maria & Razin, Assaf, 1996. "Current Account Sustainability: Selected East Asian and Latin American Experiences," CEPR Discussion Papers 1509, C.E.P.R. Discussion Papers.
  6. Willem H. Buiter, 1997. "Aspects of Fiscal Performance in Some Transition Economies Under Fund-Supported Programs," IMF Working Papers 97/31, International Monetary Fund.
  7. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
  8. Guillermo A. Calvo, 1995. "Varieties of Capital-Market Crises," IDB Publications 5721, Inter-American Development Bank.
  9. Giancarlo Corsetti & Nouriel Roubini, 1997. "Politically Motivated Fiscal Deficits: Policy Issues in Closed and Open Economies," Economics and Politics, Wiley Blackwell, vol. 9(1), pages 27-54, 03.
  10. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  11. Kornélia Krajnyák & Jeromin Zettelmeyer, 1997. "Competitiveness in Transition Economies," IMF Working Papers 97/149, International Monetary Fund.
  12. Vaclav Klaus, 1997. "Promoting financial stability in the transition economies of Central and Eastern Europe," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 183-192.
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