SHARP REDUCTIONS IN CURRENT ACCOUNT DEFICITS - AN EMPIRICAL-ANALYSIS

We study determinants and consequences of sharp reductions in current account imbalances (reversals) in low- and middle-income countries. We pose two questions: what triggers reversals, and 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, an d external variables, such as terms of trade shocks, US real interest rates and growth in industrial countries, seem to play an important ro le in explaining reversals in current-account imbalances. We also find some evidence that countries with a less appreciated real exchange ra te, higher investment and more openness prior to the reversal tend to grow faster after a reversal occurs. (C) 1998 Published by Elsevier Sc ience B.V. All rights reserved.