When Do Long-term Imbalances Lead to Current Account Reversals?
Details
State: Public
Version: author
Serval ID
serval:BIB_1DAB9182A33F
Type
Article: article from journal or magazin.
Collection
Publications
Institution
Title
When Do Long-term Imbalances Lead to Current Account Reversals?
Journal
World Economy
ISSN
1467-9701 (Online)
Publication state
Published
Issued date
01/2010
Peer-reviewed
Oui
Volume
33
Number
1
Pages
107-128
Language
english
Abstract
We extend the literature on sharp reductions in current account deficits by taking into account not only short-term determinants, but also the deviation of net foreign assets from their long-run equilibrium level. First, we analyse the long-term relationship between net foreign assets and a set of explanatory variables and construct a measure of imbalances. Next, we model current account reversals by incorporating this new measure and compare the predictive power of this model with the baseline specification that does not account for long-term imbalances. Our new model has a superior performance in and out-of-sample, especially when we control for the sign of imbalances. We also find that low net foreign assets do not necessarily lead to sharp reductions in current account deficits; it is rather the situation when they are below their equilibrium level that triggers reversals. Finally, we document that our new measure of net foreign asset imbalances is important only for developing countries, whereas standard models perform well for industrial economies.
Web of science
Publisher's website
Open Access
Yes
Create date
15/06/2010 10:24
Last modification date
20/08/2019 13:54