Have the Implications of Twin Deficits Changed?: Sudden Stops over Decades

Over the last three decades, many developing countries have experienced severe currency crises. This paper presents a study of how the importance of twin deficits (budget and current account deficits) has changed in predicting sudden stops from the 1970s to the mid-2000s using data from 42 developing countries. Results show that the explanatory power of twin deficits has declined over the decades but that deficits of these kinds remain important factors for predicting sudden stops. Our results imply that a large current account deficit is an issue even when it is not accompanied by a budget deficit. This finding contradicts Lawson’s Doctrine. Copyright International Atlantic Economic Society 2011