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Large Current Account Deficits and Neglected Vulnerabilities

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  • José Daniel Aromí

    (Universidad de Buenos Aires
    CONICET-Universidad de Buenos Aires
    FCE Universidad Católica Argentina)

Abstract

Using a sample covering 50 advanced and emerging economies over 1990–2017, it is found that large current account deficits are followed by systematic negative surprises in economic growth. This regularity is verified both in the case of advanced economies and emerging economies. In addition, large current account deficits are reversed significantly faster than what forecasters anticipate and are followed by low asset returns and drops in sentiment. The findings are robust to changes in the specification and do not seem to be explained by efficient learning dynamics. This evidence indicates that analysts are unable to incorporate the negative information transmitted by large current account deficits and has implications for the understanding of past economic events and for the design of macro-prudential policies.

Suggested Citation

  • José Daniel Aromí, 2021. "Large Current Account Deficits and Neglected Vulnerabilities," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(4), pages 597-623, December.
  • Handle: RePEc:pal:imfecr:v:69:y:2021:i:4:d:10.1057_s41308-021-00137-5
    DOI: 10.1057/s41308-021-00137-5
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    Cited by:

    1. Erhan Oruç, 2024. "Sustainability of the Current Account in Developing Countries: A Fourier Wavelet-Based Unit Root Test," Sustainability, MDPI, vol. 16(17), pages 1-14, August.

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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