When Do Long-term Imbalances Lead to Current Account Reversals?
Abstract We extend the literature on sharp reductions in current account deficits by taking into account not only short-term determinants, but also the deviation of net foreign assets from their long-run equilibrium level. First, we analyse the long-term relationship between net foreign assets and a set of explanatory variables and construct a measure of imbalances. Next, we model current account reversals by incorporating this new measure and compare the predictive power of this model with the baseline specification that does not account for long-term imbalances. Our new model has a superior performance in and out-of-sample, especially when we control for the sign of imbalances. We also find that low net foreign assets do not necessarily lead to sharp reductions in current account deficits; it is rather the situation when they are below their equilibrium level that triggers reversals. Finally, we document that our new measure of net foreign asset imbalances is important only for developing countries, whereas standard models perform well for industrial economies. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 33 (2010)
Issue (Month): 1 (01)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=0378-5920|
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0378-5920|
When requesting a correction, please mention this item's handle: RePEc:bla:worlde:v:33:y:2010:i:1:p:107-128. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.