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Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops

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  • Sebastian Edwards

Abstract

In this paper I analyze the anatomy of current account adjustments in the world economy during the last three decades. The main findings may be summarized as follows: (a) Major reversals in current account deficits have tended to be associated to sudden stops' of capital inflows. (b) The probability of a country experiencing a reversal is captured by a small number of variables that include the (lagged) current account to GDP ratio, the external debt to GDP ratio, the level of international reserves, domestic credit creation, and debt services. (c) Current account reversals have had a negative effect on real growth that goes beyond their direct effect on investments. (d) There is persuasive evidence indicating that the negative effect of current account reversals on growth will depend on the country's degree of openness. More open countries will suffer less in terms of lower growth than countries with a lower degree of openness. (e) I was unable to find evidence supporting the hypothesis that countries with a higher degree of dollarization are more severely affected by current account reversals than countries with a lower degree of dollarization. And, (f) the empirical analysis suggests that countries with more flexible exchange rate regimes are able to accommodate the shocks stemming from a reversal better than countries with more rigid exchange rate regime.

Suggested Citation

  • Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10276
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    References listed on IDEAS

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    10. Edwards, Sebastian & Levy Yeyati, Eduardo, 2005. "Flexible exchange rates as shock absorbers," European Economic Review, Elsevier, vol. 49(8), pages 2079-2105, November.
    11. Gian Maria Milesi Ferretti & Assaf Razin, 2000. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Chapters,in: Currency Crises, pages 285-323 National Bureau of Economic Research, Inc.
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    17. Sebastian Edwards, 2003. "Debt Relief and the Current Account: An Analysis of the HIPC Initiative," The World Economy, Wiley Blackwell, vol. 26(4), pages 513-531, April.
    18. 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.
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    22. Ashoka Mody & Mark P. Taylor, 2013. "International capital crunches: the time-varying role of informational asymmetries," Applied Economics, Taylor & Francis Journals, vol. 45(20), pages 2961-2973, July.
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    34. repec:rus:hseeco:123927 is not listed on IDEAS
    35. Sebastian Edwards & Raul Susmel, 2003. "Interest-Rate Volatility in Emerging Markets," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 328-348, May.
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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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