NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Sharp Reductions in Current Account Deficits: An Empirical Analyis

Gian Maria Milesi-Ferrett, Assaf Razin

NBER Working Paper No. 6310
Issued in December 1997
NBER Program(s):   IFM

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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Published: European Economic Review, Vol. 42, nos. 3-5 (May 1998): 897-908.

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