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Currency Crises, Current Account Reversals and Growth : The Compounded Effect for Emerging Markets

  • Komarek, Lubos

    (Czech National Bank)

  • Melecky, Martin

    (University of New South Wales)

This paper investigates the possible negative effect of external crises, sudden stops in capital flows and currency crises in emerging market economies. We find that a current account reversal has an important effect, both direct and indirect, on economic growth, and depresses GDP by about 1 percentage point in the current year, when using a broad group of emerging markets. On the other hand, currency crises themselves, identified as a sharp depreciation, do not appear to have a significant direct impact on growth. Their overall effect on growth is positive, though rather insignificant from an economic point of view. The joint occurrence of the currency crisis and the current account reversal appears to be the most damaging event for economic growth. Both the direct and compounded effects are about 5 times larger than those of the reversal in the current year. The estimated cumulative losses for current account reversals and the joint crisis are 2 and 21 percentage points, respectively. The time necessary for the adjustment of actual growth back to its equilibrium rate is roughly 2.5 years after the current account reversal and 6.5 years after the joint occurrence of the currency crisis and the reversal.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_735.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 735.

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Length: 36 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:wrk:warwec:735
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Web page: http://www2.warwick.ac.uk/fac/soc/economics/
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  1. 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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  3. Michael M Hutchison & Ilan Noy, 2002. "Output Costs of Currency and Balance of Payments Crises in Emerging Markets," Comparative Economic Studies, Palgrave Macmillan, vol. 44(2-3), pages 27-44, September.
  4. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
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  6. Michael M. Hutchison, 2001. "A Cure Worse Than the Disease? Currency Crises and the Output Costs of IMF-Supported Stabilization Programs," NBER Working Papers 8305, National Bureau of Economic Research, Inc.
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  8. Gian Maria Milesi-Ferrett & Assaf Razin, 1997. "Sharp Reductions in Current Account Deficits: An Empirical Analyis," NBER Working Papers 6310, National Bureau of Economic Research, Inc.
  9. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  10. Helmut Reisen, 1998. "Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance," OECD Development Centre Working Papers 136, OECD Publishing.
  11. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  12. Yung Chul Park & Jong-Wha Lee, 2001. "Recovery and Sustainability in East Asia," NBER Working Papers 8373, National Bureau of Economic Research, Inc.
  13. Guillermo A. Calvo, 2000. "Balance-of-Payments Crises in Emerging Markets: Large Capital Inflows and Sovereign Governments," NBER Chapters, in: Currency Crises, pages 71-97 National Bureau of Economic Research, Inc.
  14. Sebastian Edwards, 2002. "Does the Current Account Matter?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 21-76 National Bureau of Economic Research, Inc.
  15. Goldfajn, Ilan & Valdes, Rodrigo O., 1998. "Are currency crises predictable?," European Economic Review, Elsevier, vol. 42(3-5), pages 873-885, May.
  16. Michael Hutchison & Ilan Noy, 2002. "How bad are twins? output costs of currency and banking crises," Pacific Basin Working Paper Series 2002-02, Federal Reserve Bank of San Francisco.
  17. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 51-82, 04.
  18. Ramon Moreno, 1999. "Depreciation and recessions in East Asia," Economic Review, Federal Reserve Bank of San Francisco, pages 27-40.
  19. Dicks-Mireaux, Louis & Mecagni, Mauro & Schadler, Susan, 2000. "Evaluating the effect of IMF lending to low-income countries," Journal of Development Economics, Elsevier, vol. 61(2), pages 495-526, April.
  20. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  21. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 561-586, August.
  22. Robert J. Barro, 2001. "Economic Growth in East Asia Before and After the Financial Crisis," NBER Working Papers 8330, National Bureau of Economic Research, Inc.
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