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Does the Current Account Matter?

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  • Sebastian Edwards

Abstract

The purpose of this paper is to investigate in detail the behavior of the current account in emerging economies, and in particular its role if any in financial crises. Models of current account behavior are reviewed, and a dynamic model of current account sustainability is developed. The empirical analysis is based on a massive data set that covers over 120 countries during more than 25 years. Important controversies related to the current account including the extent to which current account deficits help predict currency crises are also analyzed. Throughout the paper I am interested in analyzing whether there is evidence supporting the idea that there are costs involved in running 'very large' deficits. Moreover, I investigate the nature of these potential costs, including whether they are particularly high in the presence of other type of imbalances.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8275.

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Date of creation: May 2001
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Publication status: published as Edwards, Sebastian. "Thirty Years Of Current Account Imbalances, Current Account Reversals And Sudden Stops," International Monetary Fund Staff Papers, 2004, v51(4), 1-49.
Handle: RePEc:nbr:nberwo:8275

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  1. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  2. Heckman, James J & Ichimura, Hidehiko & Todd, Petra, 1998. "Matching as an Econometric Evaluation Estimator," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 261-94, April.
  3. Michael D. Bordo & Barry Eichengreen, 1993. "A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform," NBER Books, National Bureau of Economic Research, Inc, number bord93-1.
  4. Sebastian Edwards, 1989. "Structural Adjustment Policies in Highly Indebted Countries," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 159-208 National Bureau of Economic Research, Inc.
  5. Ghosh, Atish R & Ostry, Jonathan D, 1995. "The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach," World Bank Economic Review, World Bank Group, vol. 9(2), pages 305-33, May.
  6. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
  7. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, December.
  8. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," IMF Working Papers 92/62, International Monetary Fund.
  9. de Cordoba, Gonzalo Fernandez & Kehoe, Timothy J., 2000. "Capital flows and real exchange rate fluctuations following Spain's entry into the European Community," Journal of International Economics, Elsevier, vol. 51(1), pages 49-78, June.
  10. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  11. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
  12. Pedro Aspe Armella & Rudiger Dornbusch & Maurice Obstfeld, 1983. "Financial Policies and the World Capital Market: The Problem of Latin American Countries," NBER Books, National Bureau of Economic Research, Inc, number arme83-1.
  13. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
  14. Morris, Stephen, 2000. "Contagion," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 57-78, January.
  15. Allen, Franklin & Gale, Douglas, 2000. "Optimal currency crises," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 177-230, December.
  16. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June.
  17. Andrew Atkeson & Jose-Victor Rios-Rull, 1995. "The Balance of Payments and Borrowing Constraints: An Alternative View of the Mexican Crisis," NBER Working Papers 5329, National Bureau of Economic Research, Inc.
  18. Guillermo A. Calvo, 2000. "Balance-of-Payments Crises in Emerging Markets: Large Capital Inflows and Sovereign Governments," NBER Chapters, in: Currency Crises, pages 71-97 National Bureau of Economic Research, Inc.
  19. Maria Milesi-Ferretti, Gian & Razin, Assaf, 1998. "Sharp reductions in current account deficits An empirical analysis," European Economic Review, Elsevier, vol. 42(3-5), pages 897-908, May.
  20. Stanley Fischer, 1984. "Real Balances, the Exchange Rate and Indexation: Real Variables in Disinflation," NBER Working Papers 1497, National Bureau of Economic Research, Inc.
  21. Bacchetta, Philippe & van Wincoop, Eric, 2000. "Trade in nominal assets and net international capital flows," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 55-72, February.
  22. Sebastian Edwards, 1999. "Crisis Prevention: Lessons from Mexico and East Asia," NBER Working Papers 7233, National Bureau of Economic Research, Inc.
  23. Fischer, Stanley, 1988. "Real Balances, the Exchange Rate, and Indexation: Real Variables in Disinflation," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 27-49, February.
  24. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  25. Sebastian Edwards & Julio A. Santaella, 1992. "Devaluation Controversies in the Developing Countries: Lessons From the Bretton Woods Era," NBER Working Papers 4047, National Bureau of Economic Research, Inc.
  26. Steven B. Kamin, 1988. "Devaluation, exchange controls, and black markets for foreign exchange in developing countries," International Finance Discussion Papers 334, Board of Governors of the Federal Reserve System (U.S.).
  27. Edwards, Sebastian, 1996. "Why are Latin America's savings rates so low? An international comparative analysis," Journal of Development Economics, Elsevier, vol. 51(1), pages 5-44, October.
  28. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Testing an optimizing model of the current account via the consumption function," Journal of International Money and Finance, Elsevier, vol. 9(2), pages 220-233, June.
  29. Heckman, James J & Ichimura, Hidehiko & Todd, Petra E, 1997. "Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Wiley Blackwell, vol. 64(4), pages 605-54, October.
  30. Loayza, Norman & Schmidt-Hebbel, Klaus & Serven, Luis, 2000. "What drives private saving around the world?," Policy Research Working Paper Series 2309, The World Bank.
  31. Andres Velasco & Roberto Chang, 2000. "Exchange-Rate Policy for Developing Countries," American Economic Review, American Economic Association, vol. 90(2), pages 71-75, May.
  32. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
  33. Edwards, Sebastian & Edwards, Alejandra Cox, 1991. "Monetarism and Liberalization," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226184890.
  34. Orazio P. Attanasio & Lucio Picci & Antonello E. Scorcu, 2000. "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 182-211, May.
  35. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
  36. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May.
  37. Edwards, Sebastian & van Wijnbergen, Sweder, 1986. "The Welfare Effects of Trade and Capital Market Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 141-48, February.
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