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Sharp Reductions in Current Account Deficits: An Empirical Analyis

  • Gian Maria Milesi-Ferrett
  • Assaf Razin

We study determinants and consequences of sharp reductions in current account" imbalances (reversals) in low- and middle-income countries. We try to answer two questions:" first, what triggers reversals? Second, what factors explain how costly reversals are? We find" that both domestic variables, such as the current account balance, openness and the level of" reserves, and external variables, such as terms of trade shocks, US real interest rates and growth" in industrial countries seem to play an important role in explaining reversals in current account" imbalances. We also find some evidence that countries with a less appreciated real exchange" rate, higher investment and openness prior to the reversal tend to grow faster after a reversal" occurs.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6310.

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Date of creation: Dec 1997
Date of revision:
Publication status: published as European Economic Review, Vol. 42, nos. 3-5 (May 1998): 897-908.
Handle: RePEc:nbr:nberwo:6310
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  1. repec:pal:imfstp:v:44:y:1997:i:2:p:210-248 is not listed on IDEAS
  2. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
  3. Jeffrey J. Frankel and Andrew K. Rose., 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," Center for International and Development Economics Research (CIDER) Working Papers C96-062, University of California at Berkeley.
  4. Guillermo A. Calvo, 1995. "Varieties of Capital-Market Crises," IDB Publications (Working Papers) 5721, Inter-American Development Bank.
  5. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  6. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
  7. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
  8. Cashin, P., 1996. "Are Australia's Current Account deficits Excessive?," Department of Economics - Working Papers Series 533, The University of Melbourne.
  9. Assaf Razin & Gian M Milesi-Ferretti, 1996. "Current Account Sustainability; Selected East Asian and Latin American Experiences," IMF Working Papers 96/110, International Monetary Fund.
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