The Library

Current account reversals and growth: the direct effect Central and Eastern Europe 1923-2000

Tools

Komárek, Luboš, Komárková, Zlatuše and Melecky, Martin (2005) Current account reversals and growth: the direct effect Central and Eastern Europe 1923-2000. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.736).

Preview

PDF
WRAP_Komarek_twerp_736.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Download (166Kb)

Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...

Abstract

According to economic theory, the capital inflows reversal - so called sudden stop - has a significant effect on economic growth. This paper investigates the direct impact of current account reversals on growth in Central and Eastern European countries. Two steps to conduct the analysis are applied. In the first step we estimate the standard growth equation augmented by an effect of the current account reversal. We find that after a current account reversal the growth rate declines by 1.10 percentage points in the current year. The subsequent analysis of the adjustment dynamics builds upon the notion of convergence. We find the unconditional and conditional convergence coefficients to be -0.47 and -0.52, respectively. This implies that the consequences of the reversal are likely eliminated after 3.3 years when the actual growth rate is back at its equilibrium level, ceteris paribus. Finally, the cumulative loss associated with a sudden stop in capital flows is about 2.3 percentage points. We infer that Central and Eastern European countries are relatively flexible in terms of adjustment and reallocation of resources given the findings in similar literature examining either a more general sample or concentrating on rather different regions.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HC Economic History and Conditions

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Capitalism -- Europe, Panel analysis, Economic development -- Europe, Balance of payments -- Europe

Series Name:

Warwick economic research papers

Publisher:

University of Warwick, Department of Economics

Place of Publication:

Coventry

Official Date:

2005

Dates:

Date	Event
2005	Published

Number:

No.736

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

References:

Aziz, J. – Caramazza, F. – Salgado, R.(2000). Currency Crises: In Search of Common Elements. IMF Working Paper WP/00/67 (March).
Baltagi, B. H. (2002). Econometric Analysis of Panel Data. Wiley College, Second Edition.
Barro, R. J. (2001): Economic Growth in East Asia before and after the Financial Crisis. NBER Working Papers Series, No. 8330.
Berg, A. and Pattillo, C. (1999): Are Currency Crises Predictable? A Test. International Monetary Fund Staff Papers, 46, June, 107-138.
Bordo, M. – Eichengreen, B. – Klingebiel, D. – Soledad Martinez-Peria, M. (2001): Is the Crisis Problem Growing More Severe? Economic Policy, 16(32), April, 53-82.
Calvo, A. G. (1998): Capital Flows and Capital-Market Crises: The simple economics of Sudden Stops, Journal of Applied Economics, 1(1), November, 35-54.
Calvo, A. G. – Reinhart, C. M. (1999): When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options. Mimeo, University of Maryland, (June).
Calvo, A. G. (2000): Balance-of-Payments Crises in Emerging Markets: Large Capital Inflows and Sovereign Governments, in Krugman, Paul (ed.) Currency Crises, Chicago, Illinois: University of Chicago Press.
Edwards, S. (2001): Does the Current Account Matter? NBER Working Papers Series, No. 8275.
Frankel, J.A. and A.K. Rose (1996). "Currency Crashes in Emerging Markets: An Empirical Treatment," Journal of International Economics.
Glick, R. – Hutchison, M. (2001): Banking and Currency Crises: How Common Are Twins? In R. Glick, R. Moreno, and M. Spiegel, eds. Financial Crises in Emerging Markets. Cambridge, UK: Cambridge University Press, Chapter 2. Previously issued as Federal Reserve Bank of San Francisco Center for Pacific Basin Studies Working Paper No. PB99-08.
Gupta, P. – Mishra, D. – Sahay, R. (2000): Output Response During Currency Crises. IMF. Manuscript dated May 2000.
Haimowitz, H. J. (1998): The Longevity of Expansions. Federal Reserve Bank of Kansas City Economic Review, Quarter 4.
Hutchison, M. M. (2001): A Cure Worse than the Disease? Currency Crises and Output Costs of IMF-Supported Stabilization Programs. NBER Working Papers Series, No. 8305.
Hutchison, M. – Neuberger, I. (2001): Output Costs of Currency and Balance of Payments Crises In Emerging Markets. Mimeo, University of California, Santa Cruz. (September).
Hutchison, M. – Neuberger, I. (2002a): How Bad Are Twins? Output Costs of Currency and Banking Crises. Mimeo, University of California, Santa Cruz. (July).
Hutchison, M. – Neuberger, I. (2002b): The Cost of Sudden Stops: Capital Flow Reversals and Output Loss. Mimeo, University of California, Santa Cruz. (July).
IMF (1998): Financial crises: characteristics and indicators of vulnerability (ch. IV). In: World Economic Outlook, Washington, D.C. IMF, May 1998.
Kaminski, G. – Lizondo, S. – Reinhart, C. (1998): Leading Indicators of Currency Crises, International Monetary Fund Staff Papers, 45, March, 1-48.
Loayza, N. – Ranciere, R. (2002): Financial Development, Financial Fragility, and Growth. Central Bank of Chile Working Papers, No 145.
Lothian, J. - Taylor, M. (1996): Real Exchange Rate Behavior: the Recent Float from the Perspective of the Past Two Centuries. Journal of Political Economy, June 1996.
Milesi-Ferretti, G. – A. Razin (1998): Sharp Reductions in Current Account Deficits: An Empirical Analysis, European Economic Review 42, 897-908.
Milesi-Ferretti, G. – A. Razin (1999): Current Account Reversals and Currency Crises: Empirical Regularities. Paper presented at NBER conference on Currency Crises, Cambridge, Mass. 2/6/98.
Moreno, R. (1999). Depreciation and Recessions in East Asia. Federal Reserve Bank of San Francisco Economic Review, 3, 27-40.
Shankar, R. (2001): Growth Effects in a Stochastic Model of Currency Crisis. Job Market Paper, University of California at Santa Cruz.