Working Paper: NBER ID: w12154
Authors: Sebastian Edwards
Abstract: In this paper I use a large multi-country data set to analyze the determinants of abrupt and large "current account reversals." The results from a variance-component probit model indicate that the probability of experiencing a major current account reversal is positively affected by larger current account deficits, lower prices of exports relative to imports, and expansive monetary policies. On the other hand, this probability is lower for more advanced countries, and for countries with flexible exchange rates. An analysis of the marginal effects of current account deficits and of the predicted probability of reversal indicates that both have increased significantly for the U.S. since 1999. However, the level of this probability is still on the low side. I estimate that the predicted probability of a current account reversal in the U.S. has increased from 1.7% in 1999, to 14.9% in 2006.
Keywords: No keywords provided
JEL Codes: F02; F43; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| larger current account deficits (F32) | higher likelihood of reversal (D81) |
| deterioration in terms of trade (F14) | higher likelihood of reversal (D81) |
| expansive monetary policies (E63) | higher likelihood of reversal (D81) |
| advanced economies (O52) | lower likelihood of reversal (D91) |
| flexible exchange rates (F31) | lower likelihood of reversal (D91) |