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Rapid Current Account Adjustments; Are Microstates Different?

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  • Patrick A. Imam

Abstract

We describe unique aspects of microstates-they are less diversified, suffer from lumpiness of investment, they are geographically at the periphery and prone to natural disasters, and have less access to capital markets-that may make the current account more vulnerable, penalizing exports and making imports dearer. After reviewing the "old" and "new" view on current account deficits, we attempt to identify policies to help reduce the current account. Probit regressions suggest that microstates are more likely to have large current account adjustments if (i) they are already running large current account deficits; (ii) they run budget surpluses; (iii) the terms of trade improve; (iv) they are less open; and (v) GDP growth declines. Monetary policy, financial development, per capita GDP, and the de jure exchange rate classification matter less. However, changes in the real effective exchange rate do not help drive reductions in the current account deficit in microstates. We explore reasons for this and provide policy implications.

Suggested Citation

  • Patrick A. Imam, 2008. "Rapid Current Account Adjustments; Are Microstates Different?," IMF Working Papers 08/233, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/233
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    Cited by:

    1. Patrick A. Imam, 2009. "Introducing the Euro as Legal Tender—Benefits and Costs of Eurorization for Cape Verde," IMF Working Papers 09/146, International Monetary Fund.
    2. Yehenew Endegnanew & Charles Amo-Yartey & Therese Turner-Jones, 2013. "Fiscal policy and the current account: are microstates different?," Applied Economics, Taylor & Francis Journals, vol. 45(29), pages 4137-4151, October.
    3. Patrick Imam, 2012. "Exchange Rate Choices of Microstates," The Developing Economies, Institute of Developing Economies, vol. 50(3), pages 207-235, September.
    4. Paul Cashin & Samya Beidas-Strom, 2011. "Are Middle Eastern Current Account Imbalances Excessive?," IMF Working Papers 11/195, International Monetary Fund.
    5. Yehenew Endegnanew & Therese Turner-Jones & Charles Amo Yartey, 2012. "Fiscal Policy and the Current Account; Are Microstates Different?," IMF Working Papers 12/51, International Monetary Fund.

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