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Currency Crises, Current Account Reversals and Growth : The Compounded Effect for Emerging Markets

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  • Komarek, Lubos

    (Czech National Bank)

  • Melecky, Martin

    (University of New South Wales)

Abstract

This paper investigates the possible negative effect of external crises, sudden stops in capital flows and currency crises in emerging market economies. We find that a current account reversal has an important effect, both direct and indirect, on economic growth, and depresses GDP by about 1 percentage point in the current year, when using a broad group of emerging markets. On the other hand, currency crises themselves, identified as a sharp depreciation, do not appear to have a significant direct impact on growth. Their overall effect on growth is positive, though rather insignificant from an economic point of view. The joint occurrence of the currency crisis and the current account reversal appears to be the most damaging event for economic growth. Both the direct and compounded effects are about 5 times larger than those of the reversal in the current year. The estimated cumulative losses for current account reversals and the joint crisis are 2 and 21 percentage points, respectively. The time necessary for the adjustment of actual growth back to its equilibrium rate is roughly 2.5 years after the current account reversal and 6.5 years after the joint occurrence of the currency crisis and the reversal.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_735.pdf
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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 735.

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Length: 36 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:wrk:warwec:735

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Keywords: External Crises ; Economic Growth ; Open Transition Economy ; Panel Data;

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References

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  1. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR & CES & MSH, vol. 16(32), pages 51-82, 04.
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Citations

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Cited by:
  1. Bernardina Algieri & Thierry Bracke, 2007. "Patterns of Current Account Adjustment – Insights from Past Experience," CESifo Working Paper Series 2029, CESifo Group Munich.
  2. Aßmann, Christian, 2011. "Assessing the effect of current account and currency crises on economic growth," BERG Working Paper Series 80, Bamberg University, Bamberg Economic Research Group.
  3. Antonio Francisco A. Silva Jr, 2011. "The Self-insurance Role of International Reserves and the 2008-2010 Crisis," Working Papers Series 256, Central Bank of Brazil, Research Department.
  4. Levan Efremidze & Samuel M. Schreyer & Ozan Sula, 2011. "Sudden stops and currency crises," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(4), pages 304-321, November.
  5. Aßmann, Christian, 2008. "Assessing the Effect of Current Account and Currency Crises on Economic Growth," Economics Working Papers 2008,01, Christian-Albrechts-University of Kiel, Department of Economics.
  6. Algieri, Bernardina & Bracke, Thierry, 2007. "Patterns of current account adjustment: insights from past experience," Working Paper Series 0762, European Central Bank.

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