NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Current Account Reversals and Currency Crises: Empirical Regularities

Gian Maria Milesi-Ferrett, Assaf Razin

NBER Working Paper No. 6620
Issued in June 1998
NBER Program(s):   PE

This paper studies sharp reductions in current account deficits and large exchange rate depreciations in low- and middle-income countries. It examines which factors help predict the occurrence of a reversal or a currency crisis, and how these events affect macroeconomic performance. It finds that both domestic factors, such as the low reserves, and external factors, such as unfavorable terms of trade and high interest rates in industrial countries, trigger reversals and currency crises. The two types of events are, however, distinct; indeed, current account imbalances are not sharply reduced in the years following a currency crisis. Economic performance around these events is also quite different. An exchange rate crash is associated with a fall in output growth and a recovery thereafter, while for reversal events there is no systematic evidence of a growth slowdown.

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Document Object Identifier (DOI): 10.3386/w6620

Published: Current Account Reversals and Currency Crises: Empirical Regularities, Gian Maria Milesi Ferretti, Assaf Razin. in Currency Crises, Krugman. 2000

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