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Does the Current Account Matter?

In: Preventing Currency Crises in Emerging Markets

  • Sebastian Edwards

The purpose of this paper is to investigate in detail the behavior of the current account in emerging economies, and in particular its role if any in financial crises. Models of current account behavior are reviewed, and a dynamic model of current account sustainability is developed. The empirical analysis is based on a massive data set that covers over 120 countries during more than 25 years. Important controversies related to the current account including the extent to which current account deficits help predict currency crises are also analyzed. Throughout the paper I am interested in analyzing whether there is evidence supporting the idea that there are costs involved in running 'very large' deficits. Moreover, I investigate the nature of these potential costs, including whether they are particularly high in the presence of other type of imbalances.

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This chapter was published in:
  • Sebastian Edwards & Jeffrey A. Frankel, 2002. "Preventing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa02-2, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10633.
    Handle: RePEc:nbr:nberch:10633
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
    2. de Cordoba, Gonzalo Fernandez & Kehoe, Timothy J., 2000. "Capital flows and real exchange rate fluctuations following Spain's entry into the European Community," Journal of International Economics, Elsevier, vol. 51(1), pages 49-78, June.
    3. Orazio P. Attanasio & Lucio Picci & Antonello E. Scorcu, 2000. "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 182-211, May.
    4. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
    5. Edwards, Sebastian, 1996. "Why are Latin America's savings rates so low? An international comparative analysis," Journal of Development Economics, Elsevier, vol. 51(1), pages 5-44, October.
    6. Morris, Stephen, 2000. "Contagion," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 57-78, January.
    7. Sebastian Edwards, 1989. "Structural Adjustment Policies in Highly Indebted Countries," NBER Chapters, in: Developing Country Debt and the World Economy, pages 249-262 National Bureau of Economic Research, Inc.
    8. Steven B. Kamin, 1988. "Devaluation, exchange controls, and black markets for foreign exchange in developing countries," International Finance Discussion Papers 334, Board of Governors of the Federal Reserve System (U.S.).
    9. Stanley Fischer, 1984. "Real Balances, the Exchange Rate and Indexation: Real Variables in Disinflation," NBER Working Papers 1497, National Bureau of Economic Research, Inc.
    10. Sebastian Edwards & Julio Santaella, 1993. "Devaluation Controversies in the Developing Countries: Lessons from the Bretton Woods Era," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 405-460 National Bureau of Economic Research, Inc.
    11. Fischer, Stanley, 1988. "Real Balances, the Exchange Rate, and Indexation: Real Variables in Disinflation," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 27-49, February.
    12. Guillermo A. Calvo, 2000. "Balance-of-Payments Crises in Emerging Markets: Large Capital Inflows and Sovereign Governments," NBER Chapters, in: Currency Crises, pages 71-97 National Bureau of Economic Research, Inc.
    13. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
    14. Michael D. Bordo & Barry Eichengreen, 1993. "A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform," NBER Books, National Bureau of Economic Research, Inc, number bord93-1, October.
    15. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May.
    16. Andrew Atkeson & Jose-Victor Rios-Rull, 1995. "The Balance of Payments and Borrowing Constraints: An Alternative View of the Mexican Crisis," NBER Working Papers 5329, National Bureau of Economic Research, Inc.
    17. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper tigers? A model of the Asian crisis," Research Paper 9822, Federal Reserve Bank of New York.
    18. Allen, Franklin & Gale, Douglas, 2000. "Optimal currency crises," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 177-230, December.
    19. Pedro Aspe Armella & Rudiger Dornbusch & Maurice Obstfeld, 1983. "Financial Policies and the World Capital Market: The Problem of Latin American Countries," NBER Books, National Bureau of Economic Research, Inc, number arme83-1, October.
    20. Maria Milesi-Ferretti, Gian & Razin, Assaf, 1998. "Sharp reductions in current account deficits An empirical analysis," European Economic Review, Elsevier, vol. 42(3-5), pages 897-908, May.
    21. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, June.
    22. Bacchetta, Philippe & van Wincoop, Eric, 1997. "Trade in Nominal Assets and Net International Capital Flows," CEPR Discussion Papers 1569, C.E.P.R. Discussion Papers.
    23. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Testing an optimizing model of the current account via the consumption function," Journal of International Money and Finance, Elsevier, vol. 9(2), pages 220-233, June.
    24. Andres Velasco & Roberto Chang, 2000. "Exchange-Rate Policy for Developing Countries," American Economic Review, American Economic Association, vol. 90(2), pages 71-75, May.
    25. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
    26. Edwards, Sebastian & van Wijnbergen, Sweder, 1986. "The Welfare Effects of Trade and Capital Market Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 141-48, February.
    27. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    28. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
    29. Loayza, Norman & Schmidt-Hebbel, Klaus & Serven, Luis, 2000. "What drives private saving around the world?," Policy Research Working Paper Series 2309, The World Bank.
    30. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
    31. Sebastian Edwards, 1999. "Crisis Prevention: Lessons from Mexico and East Asia," NBER Working Papers 7233, National Bureau of Economic Research, Inc.
    32. Heckman, James J & Ichimura, Hidehiko & Todd, Petra E, 1997. "Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Wiley Blackwell, vol. 64(4), pages 605-54, October.
    33. Edwards, Sebastian & Edwards, Alejandra Cox, 1991. "Monetarism and Liberalization," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226184890.
    34. Ghosh, Atish R & Ostry, Jonathan D, 1995. "The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach," World Bank Economic Review, World Bank Group, vol. 9(2), pages 305-33, May.
    35. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
    36. Heckman, James J & Ichimura, Hidehiko & Todd, Petra, 1998. "Matching as an Econometric Evaluation Estimator," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 261-94, April.
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