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The Impact of Current Account Reversals on Growth in Central and Eastern Europe

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  • Martin Melecky

    (School of Economics, University of New South Wales)

Abstract

According to economic theory, the capital inflows reversal – so-called sudden stop – has a significant negative effect on economic growth. This paper investigates the direct impact of current account reversals on growth in Central and Eastern European countries. Two steps to conduct the analysis are applied. In the first step the standard growth equation is estimated when including the current account reversal impulse dummy. I find that after a current account reversal the growth rate declines by 1.10 percentage points in the current year. The subsequent analysis of the adjustment dynamics builds upon the notion of convergence. The unconditional and conditional convergence coefficients are found to be - 0.47 and -0.52, respectively. This implies that the consequences of the reversal are likely eliminated after 3.3 years when the actual growth rate is back at its equilibrium level, ceteris paribus. Finally, the cumulative loss associated with a sudden stop in capital flows is about 2.3 percentage points. One may infer that Central and Eastern European countries are relatively flexible in terms of adjustment and reallocation of resources given the findings in similar literature examining either a more general sample or concentrating on rather different regions.

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File URL: http://128.118.178.162/eps/if/papers/0502/0502004.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0502004.

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Length: 24 pages
Date of creation: 04 Feb 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0502004

Note: Type of Document - pdf; pages: 24
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Web page: http://128.118.178.162

Related research

Keywords: Current Account Reversals; Economic Growth; Emerging Market Economies; Adjustment Dynamics; Panel Data;

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Cited by:
  1. Scott W. Hegerty, 2011. "Capital Flows to Russia, Ukraine, and Belarus: Does "Hot" Money Respond Differently to Macroeconomic Shocks?," New York Economic Review, New York State Economics Association (NYSEA), vol. 42(1), pages 47-62.
  2. Aleksander Aristovnik, 2005. "Current Account Reversals In Selected Transition Countries," International Finance 0510021, EconWPA.
  3. Ai Lian Tan Author_Email: tanal@utar.edu.my & Shiau Mooi Lim & Seow Shin Koong & Ying Yin Koay, 2011. "Exchange Rate And Current Account: Are They Co-Integrated Symmetrically Or Asymmetrically?," Annual Summit on Business and Entrepreneurial Studies (ASBES 2011) Proceeding 2011-019-150, Conference Master Resources.
  4. Scott W Hegerty, 2009. "Capital flows to transition economies: what is the role of external shocks?," Economics Bulletin, AccessEcon, vol. 29(2), pages 1345-1358.
  5. Aleksander Aristovnik, 2006. "Current Account Reversals and Persistency in Transition Regions," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 9(1), pages 1-43, May.

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