The Impact of Current Account Reversals on Growth in Central and Eastern Europe
AbstractAccording 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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Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0502004.
Length: 24 pages
Date of creation: 04 Feb 2005
Date of revision:
Note: Type of Document - pdf; pages: 24
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Current Account Reversals; Economic Growth; Emerging Market Economies; Adjustment Dynamics; Panel Data;
Other versions of this item:
- Martin Melecky, 2005. "The Impact of Current Account Reversals on Growth in Central and Eastern Europe," Eastern European Economics, M.E. Sharpe, Inc., vol. 43(2), pages 57-72, March.
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
- O52 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Europe
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- 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.
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