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How sustainable are current account deficits in selected transition economies?

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  • Aristovnik, Aleksander

Abstract

The article examines the issue of ‘current account sustainability’ in seventeen transition economies. For this purpose, two accounting frameworks (Milesi-Ferreti and Razin, 1996; Reisen, 1998) based on certain strict assumptions are employed. The results show that if the observed level of foreign direct investment (FDI) flows is kept in the medium run almost all countries could optimally have a higher level of external deficit, with the exception of countries such as Baltic States, Hungary, Macedonia, Moldova and Romania. Accordingly, the maintenance of relatively large FDI inflows (especially greenfield investments) to national economies is a key priority in securing future external sustainability. In the end, the results indicate that current account deficits of transition economies that exceed 5 percent of GDP generally involve problems of their external sustainability.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 485.

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Date of creation: 26 Mar 2006
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Publication status: Published in Journal of Economics 1.55(2007): pp. 19-39
Handle: RePEc:pra:mprapa:485

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Keywords: transition economies; current account deficits; sustainability; FDI;

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  1. Jarko Fidrmuc, 2003. "The Feldstein–Horioka Puzzle and Twin Deficits in Selected Countries," Economic Change and Restructuring, Springer, vol. 36(2), pages 135-152, June.
  2. Coricelli, Fabrizio & Jazbec, Bostjan, 2001. "Real Exchange Rate Dynamics in Transition Economies," CEPR Discussion Papers 2869, C.E.P.R. Discussion Papers.
  3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, November.
  4. Helmut Reisen, 1998. "Sustainable and Excessive Current Account Deficits," Empirica, Springer, vol. 25(2), pages 111-131, January.
  5. Matthieu Bussière & Marcel Fratzscher & Author-Name: Gernot J. Müller, 2004. "Current account dynamics in OECD and EU acceding countries - an intertemporal approach," Working Paper Series 311, European Central Bank.
  6. Catherine L. Mann, 2002. "Perspectives on the U.S. Current Account Deficit and Sustainability," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 131-152, Summer.
  7. 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.
  8. Paul Cashin & C. John McDermott, 1998. "International Capital Flows and National Creditworthiness-Do the Fundamental Things Apply as Time Goes By?," IMF Working Papers 98/172, International Monetary Fund.
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