Determinants of Current Account Deficits in Developing Countries

The objective of this paper is to provide some stylized facts on the links between current account deficits and a broad set of economic variables proposed by the literature. In order to accomplish this task, we complement and extend previous empirical research by (1) using a large and consistent macroeconomic data set on current account deficits and other national income variables, (2) focusing on developing economies by drawing on a panel data set consisting of 44 developing countries and annual information for the period 1966-94, (3) adopting a reduced-form approach, instead of holding to a particular structural model, (4) distinguishing between within-country and cross-country effects, and (5) employing a class of estimators that controls for simultaneity and reverse causation. Some of our findings are the following. (i) Current account deficits are moderately persistent. (ii) A rise in domestic output growth generates larger current account deficits. (iii) Shocks that increase the terms of trade or appreciate the real exchange rate are linked with higher current account deficits. And (iv) either higher growth rates in industrialized economies or larger international interest rates reduce the current account deficit in developing economies.