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The Empirical Dimension of Overborrowing

Author

Listed:
  • Damián Pierri

    (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)

  • Gabriel Montes Rojas

    (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)

  • Pablo Mira Lambi

    (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)

Abstract

Persistent current account deficits are common among low and middle income countries. When is this situation dangerous? Is there a critical value for the yearly current account deficit just before the crisis sets off? We provide a positive answer to the last question; a finding that gives rise to an empirical measure of overborrowing. We observe that countries that have increased their external indebtedness by at least 26%-31% of the GDP in a time span of 3 to 5 years are more prone to be hit by a sudden stop. The typical crisis produces a consumption drop of 4% of GDP and current account reversal of 2.5-4.5% of GDP. We also contribute to the structural characterization of sudden stops. Using a canonical model we are able to replicate these stylized facts. Moreover, we compute the ratio of net debt to GDP. This parameter is two or three times bigger than the benchmark value in the literature, a fact that improves the empirical performance of the model. From a policy perspective, our findings help to elaborate leading indicators to anticipate a sudden stop.

Suggested Citation

  • Damián Pierri & Gabriel Montes Rojas & Pablo Mira Lambi, 2019. "The Empirical Dimension of Overborrowing," Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) 2019-45, Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET).
  • Handle: RePEc:ake:iiepdt:201945
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    References listed on IDEAS

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    Cited by:

    1. José Daniel Aromí, 2021. "Large Current Account Deficits and Neglected Vulnerabilities," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(4), pages 597-623, December.

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    More about this item

    Keywords

    Sudden Stops; Current Account Deficits; Debt;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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