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Current Account Reversals and Growth: The Direct Effect Central and Eastern Europe 1923-2000

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Author Info
Komarek, Lubos (Czech National Bank)
Komarkova, Zlatuse (Prague School of Economics)
Melecky, Martin (University of New South Wales)

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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 we estimate the standard growth equation augmented by an effect of the current account reversal. We 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. We find the unconditional and conditional convergence coefficients 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. We 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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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 736.

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Length: 24 pages
Date of creation: 2005
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Handle: RePEc:wrk:warwec:736

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

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Find related papers by JEL classification:
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
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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  2. 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. [Downloadable!] (restricted)
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  9. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany. [Downloadable!]
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  12. Michael M. Hutchison, . "A Cure Worse Than The Disease? Currency Crises and the Output Costs of IMF-Supported Stabilization Programs," EPRU Working Paper Series 01-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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  14. Sebastian Edwards, 2001. "Does the Current Account Matter?," NBER Working Papers 8275, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Guillermo A. Calvo, 2000. "Balance-of-Payments Crises in Emerging Markets, Large Capital Inflows and Sovereign Governments," NBER Chapters, in: Currency Crises, pages 71-104 National Bureau of Economic Research, Inc. [Downloadable!]
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