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Current Account Adjustment and Financial Integration

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Abstract

The paper investigates whether higher financial integration leads in general to slower current account adjustments. The study estimates theoretically founded trade balance reaction functions for a panel of seventy countries from 1970-2004. The empirical analysis finds that adjustment in integrated economies is slower. Consistent with the presented theory the trade balance of integrated economies is more persistent, responds less strongly to net foreign assets, and is more sensitive to fluctuations in net output. A sufficiently strong response to net foreign assets is also a condition for external sustainability. Under high integration countries appear to stay close to the sustainability limit.

Suggested Citation

  • Pascal Towbin, 2008. "Current Account Adjustment and Financial Integration," IHEID Working Papers 11-2008, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp11-2008
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    File URL: http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIDWP11-2008.pdf
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    References listed on IDEAS

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    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
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    Cited by:

    1. Mr. Tomasz Wieladek & Mr. Sergi Lanau, 2012. "Financial Regulation and the Current Account," IMF Working Papers 2012/098, International Monetary Fund.

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    More about this item

    Keywords

    current account adjustment; reaction function; financial integration; capital mobility;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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