TY  - JOUR
AU  - Edwards,Sebastian
TI  - External Imbalances in an Advanced, Commodity-Exporting Country: The Case of New Zealand
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12620
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12620
L1  - http://www.nber.org/papers/w12620.pdf
N1  - Author contact info:
Sebastian Edwards
UCLA Anderson Graduate School of Business
110 Westwood Plaza, Suite C508
Box 951481
Los Angeles, CA 90095-1481
Tel: 310/206-6797
Fax: 310/206-5825
E-Mail: sebastian.edwards@anderson.ucla.edu
AB  - During the last three years New Zealand has faced increasingly large external imbalances.  The current account deficit has increased from 4.3% of GDP in 2003 to almost 9.0% of GDP in 2005.   During the same period the country’s net international investment position (NIIP) went from a negative level equivalent to 78.5% of GDP to negative 89% of GDP.  In this paper I analyze the potential consequences of New Zealand’s external imbalances.  More specifically, I investigate what is the probability that New Zealand will undergo a costly adjustment characterized by an abrupt and large current account reversal.  I find that to an important extent the (very) negative NIIP and (very) large current account deficit may be explained by New Zealand’s very close economic relationship with Australia.  The econometric results suggest that the rapid growth in the deficit during the last few years has (greatly) increased New Zealand’s vulnerability to “contagion.”  It has also increased the advantage of the country’s current floating exchange rate regime.
ER  -