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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
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The Growth Effects of Current Account Reversals
The Role of Macroeconomic Policies
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- Luiz de Mello, Pier Carlo Padoan1, Linda Rousová1
- Author Affiliations
- 1: OECD, France
- 30 May 2011
- Bibliographic information
This paper assesses empirically whether or not current account reversals have permanent growth effects and the role of macroeconomic policies in this process. The methodology developed in de Mello, Padoan and Rousova (2010) to identify a chronology of current account reversals is applied to the real growth rate of GDP of more than 100 countries during the period 1971-2007. We use ordered probit models to show that current account reversals associated with improvements in external positions increase the probability of a sustained rise in the rate of growth of GDP (growth acceleration) beyond those generated by real exchange rate effects. Current account reversals associated with a deterioration of external positions make impending GDP accelerations less likely. The macroeconomic policy stance prevailing at the time of current account reversals also matters. High budget deficits thwart the positive effect of a current account improvement on the probability of a growth acceleration. By contrast, a monetary tightening in association with a current account deterioration makes an impending growth acceleration more likely. This paper improves our understanding of how macroeconomic policies help countries maximise the growth payoff of current account improvements.
- fiscal policy, current account reversals, monetary policy, trend GDP growth
- JEL Classification:
- C32: Mathematical and Quantitative Methods / Multiple or Simultaneous Equation Models; Multiple Variables / Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
- C35: Mathematical and Quantitative Methods / Multiple or Simultaneous Equation Models; Multiple Variables / Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- F32: International Economics / International Finance / Current Account Adjustment; Short-Term Capital Movements
- F43: International Economics / Macroeconomic Aspects of International Trade and Finance / Economic Growth of Open Economies