CURRENT ACCOUNT SUSTAINABILITY IN SELECTED TRANSITION COUNTRIES

Aleksander Aristovnik

No wp844, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan Stephen M. Ross Business School

Abstract: The article examines the question of whether the current account deficits seen in selected transition economies in recent years mainly as a symptom of the dynamic economic activity of the catching-up process are a source of potential macroeconomic destabilisation. Given the possible significant reduction of capital flows, as well as restrictions and lessons from recent financial crises, current account deficits must be closely monitored in the region. In this respect, the issue of ‘current account sustainability’ in seventeen transition economies is investigated. For this purpose, two accounting frameworks (Milesi-Ferreti and Razin, 1996; Reisen, 1998) based on certain strict assumptions are employed. The results show that if the observed level of foreign direct investment (FDI) flows is kept in the medium run almost all countries could optimally have a higher level of external deficit, with the exception of countries such as Baltic States, Hungary, Macedonia, Moldova and Romania. Accordingly, the maintenance of relatively large FDI inflows (especially greenfield investments) to national economies is a key priority in securing future external sustainability. In the end, the results indicate that current account deficits of transition economies that exceed 5 percent of GDP generally involve problems of their external sustainability.

Keywords: transition economies; current account deficits; sustainability; FDI (search for similar items in EconPapers)
JEL-codes: C33 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-ifn
Date: 2006-11-01
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Persistent link: http://EconPapers.repec.org/RePEc:wdi:papers:2006-844

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