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Current Account Sustainability In Selected Transition Countries

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  • Aleksander Aristovnik

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Abstract

The article examines the question of whether the current account deficits seen in selected transition economies in recent years mainly as a symptom of the dynamic economic activity of the catching-up process are a source of potential macroeconomic destabilisation. Given the possible significant reduction of capital flows, as well as restrictions and lessons from recent financial crises, current account deficits must be closely monitored in the region. In this respect, the issue of ‘current account sustainability’ in seventeen transition economies is investigated. 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 William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp844.

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Length: pages
Date of creation: 01 Nov 2006
Date of revision:
Handle: RePEc:wdi:papers:2006-844

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

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  1. Coricelli, Fabrizio & Jazbec, Bostjan, 2004. "Real exchange rate dynamics in transition economies," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 15(1), pages 83-100, March.
  2. Helmut Reisen, 1998. "Sustainable and Excessive Current Account Deficits," Empirica, Springer, Springer, vol. 25(2), pages 111-131, January.
  3. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
  4. Sebastian Edwards, 2001. "Does the Current Account Matter?," NBER Working Papers 8275, National Bureau of Economic Research, Inc.
  5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  6. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
  7. Jarko Fidrmuc, 2003. "The Feldstein–Horioka Puzzle and Twin Deficits in Selected Countries," Economic Change and Restructuring, Springer, Springer, vol. 36(2), pages 135-152, June.
  8. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview," NBER Working Papers 6833, National Bureau of Economic Research, Inc.
  9. Jan Svejnar, 2002. "Transition Economies: Performance and Challenges," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 16(1), pages 3-28, Winter.
  10. Paul Cashin & C. John McDermott, 1998. "International Capital Flows and National Creditworthiness," IMF Working Papers 98/172, International Monetary Fund.
  11. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  12. Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2004. "Current accounts dynamics in OECD and EU acceding countries - an intertemporal approach," Working Paper Series, European Central Bank 0311, European Central Bank.
  13. 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, Elsevier, vol. 51(1), pages 49-78, June.
  14. Catherine L. Mann, 2002. "Perspectives on the U.S. Current Account Deficit and Sustainability," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 16(3), pages 131-152, Summer.
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Cited by:
  1. Dumitriu, Ramona & Stefanescu, Răzvan, 2013. "Romanian current account sustainability after the adhesion to European Union," MPRA Paper 51244, University Library of Munich, Germany, revised 05 Apr 2013.
  2. Rubaszek, Michał, 2008. "Economic convergence and the fundamental equilibrium exchange rate in Poland," MPRA Paper 12910, University Library of Munich, Germany.
  3. Ca' Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2009. "Current account benchmarks for central and eastern Europe: a desperate search?," Working Paper Series, European Central Bank 0995, European Central Bank.

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