Persistent Episodes of Current Account Imbalances: An Empirical Analysis

This paper empirically documents the important differences between persistent episodes of current account surplus and current account deficits in the last four decades. Motivated by a reversal of global imbalances in the last decades, results derived from this study show how persistent surplus episodes, associated to emerging markets in Asia and net exporters of natural resources, are driven by official capital flows, leave countries internationally more exposed and are less persistent than deficit episodes in developing economies. Positive imbalances seem to be prolonged by high investment or low domestic saving, slow output growth, improvements in the terms of trade and wide spreads between domestic and world interest rates. In contrast, high levels of international reserves and inflation increase the probability of a reversal. Opposite to the aftermath of persistent deficits, reversals from surplus episodes trigger massive inflows of private capital, significantly increasing output growth but surprisingly leaving the real effective exchange rate mainly unaltered. The paper is divided into three main sections. First, I analyze the economic performance of countries while running persistent imbalances. Second, I use a logit model to study the determinants of reversals at the end of these episodes. Finally, I examine the economic consequences of these reversals. I’m indebted to my dissertation advisor Michael Dooley for his guidance and support, also special thank