Did the Current Account Matter? The Case of Korea*

This paper examines whether the current account deficits in Korea in the period before the Asian financial crisis were excessive from the consumption smoothing perspective. A vector autoregression (VAR) model is estimated to derive the optimal path implied in an intertemporal model of the current account and then the theoretical restrictions implied by the theory are tested against data. This would help to answer the question of whether the persistent current account deficits should have been taken as an 'early-warning indicator ' for the crisis. This paper finds evidence that the current account prior to the crisis was broadly consistent with the theoretical current account and was hardly a matter of serious concern. JEL Classification: E21, F3