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Sustainable and Excessive Current Account Deficits

  • Helmut Reisen

Large current account deficits are often assumed to play an important role in the propagation of financial crises in emerging markets in receipt of heavy private capital inflows. This paper reaches some major conclusions. First , the Lawson Doctrine — according to which current account deficits that result from a shift in private-sector behaviour should not be a public policy concern — has been discredited by recent currency crises in Latin America and Asia. Second , it is possible to define the size of current account deficits that should be sustainable in the long run. Third , the intertemporal approach to the current account does not provide a reliable benchmark to define when deficits become “excessive”. Fourth , large external deficits should be resisted if unsustainable currency appreciation, excessive risk-taking in the banking system and a sharp drop in private savings are seen to coincide ... Les déficits de la balance des opérations courantes sont-ils largement responsables de la propagation des crises financières dans les marchés émergents qui reçoivent des flux importants de capitaux privés ? Ce document présente plusieurs résultats de recherche relatifs à ce problème. Premièrement , la doctrine de Lawson — selon laquelle les politiques publiques ne devraient pas se soucier des déficits des comptes courants liés aux comportements incohérents du secteur privé — a été discréditée par les crises monétaires qui ont récemment frappé l’Asie et l’Amérique latine. Deuxièmement , il est possible de préciser quel niveau de déficit des comptes courants est tenable à long terme. Troisièmement , on ne peut se fier à une approche intertemporelle pour définir le seuil à partir duquel les déficits deviennent « excessifs ». Quatrièmement, il faut éviter les déficits extérieurs importants lorsque la monnaie est surévaluée, que le secteur bancaire prend trop de risques et que l’on observe ...

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Paper provided by OECD Publishing in its series OECD Development Centre Working Papers with number 132.

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Date of creation: Feb 1998
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Handle: RePEc:oec:devaaa:132-en
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  1. Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February.
  2. Helmut Reisen, 1996. "Net capital inflows: how much to accept, how much to resist?," Proceedings, Federal Reserve Bank of San Francisco, pages 289-321.
  3. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  4. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
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  6. Razin, A., 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," Papers 2-93, Tel Aviv - the Sackler Institute of Economic Studies.
  7. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The "Overborrowing Syndrome"," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
  8. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier.
  9. Calvo, Guillermo A., 1987. "On the costs of temporary policy," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 245-261, October.
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  11. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
  12. Adrian Blundell-Wignall & Frank Browne, 1991. "Macroeconomic Consequences of Financial Liberalisation: A Summary Report," OECD Economics Department Working Papers 98, OECD Publishing.
  13. Sebastian Edwards, 1995. "Why are Saving Rates so Different Across Countries?: An International Comparative Analysis," NBER Working Papers 5097, National Bureau of Economic Research, Inc.
  14. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  15. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  16. Lawrence H. Summers, 1988. "Tax Policy and International Competitiveness," NBER Chapters, in: International Aspects of Fiscal Policies, pages 349-386 National Bureau of Economic Research, Inc.
  17. Fry, M., 1996. "How Foreign Direct Investment in Pacific Asia Improves in Current Account," Papers 96-02, University of Birmingham - International Financial Group.
  18. Landis MacKellar & Helmut Reisen, 1998. "A Simulation Model of Global Pension Investment," OECD Development Centre Working Papers 137, OECD Publishing.
  19. Fry, Maxwell J., 1996. "How foreign direct investment in Pacific Asia improves the current account," Journal of Asian Economics, Elsevier, vol. 7(3), pages 459-486.
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