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Growth Following Investment and Consumption-Driven Current Account Crises

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  • Alexander D Klemm

Abstract

Current account deficits imply increasing liabilities to the rest of the world. External sustainability then depends on whether these can be met in the future without defaulting, i.e., normally through trade account surpluses. To run such surpluses without a fall in consumption, capital inflows should be used to increase future output. This paper tentatively finds that current account deficits reversals that follow investment booms are marked by better growth performance than those following consumption booms. It also shows that many recent large current account deficits have been predominantly the result of consumption or non-productive investment booms.

Suggested Citation

  • Alexander D Klemm, 2013. "Growth Following Investment and Consumption-Driven Current Account Crises," IMF Working Papers 13/217, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/217
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    References listed on IDEAS

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    1. 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.
    2. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc.
    3. Charles Engel & John H. Rogers, 2006. "The U.S. current account deficit and the expected share of world output," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    4. John Kitchen, 2007. "Sharecroppers or Shrewd Capitalists? Projections of the US Current Account, International Income Flows, and Net International Debt," Review of International Economics, Wiley Blackwell, vol. 15(5), pages 1036-1061, November.
    5. Daniel Gros, 2006. "Why the US Current Account Deficit is Not Sustainable," International Finance, Wiley Blackwell, vol. 9(2), pages 241-260, August.
    6. Matthew Higgins & Thomas Klitgaard, 2011. "Saving imbalances and the euro area sovereign debt crisis," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 17(Sept).
    7. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? If Not, How Costly Is Adjustment Likely to Be?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 211-288.
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    More about this item

    Keywords

    Economic models; Current account deficits; Current account; Consumption; Economic growth; Investment; Public investment; Savings; current account deficit; current accounts; current account surpluses;

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