The Empirical Dimension of Overborrowing

Damian Pierri, Gabriel Montes-Rojas () and Pablo Mira Lambi ()
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Pablo Mira Lambi: Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET

No 2019-45, Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) from Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET)

Abstract: Persistent current account deficits are common among low and middle income countries. When is this situation dangerous? Is there a critical value for the yearly current account deficit just before the crisis sets off? We provide a positive answer to the last question; a finding that gives rise to an empirical measure of overborrowing. We observe that countries that have increased their external indebtedness by at least 26%-31% of the GDP in a time span of 3 to 5 years are more prone to be hit by a sudden stop. The typical crisis produces a consumption drop of 4% of GDP and current account reversal of 2.5-4.5% of GDP. We also contribute to the structural characterization of sudden stops. Using a canonical model we are able to replicate these stylized facts. Moreover, we compute the ratio of net debt to GDP. This parameter is two or three times bigger than the benchmark value in the literature, a fact that improves the empirical performance of the model. From a policy perspective, our findings help to elaborate leading indicators to anticipate a sudden stop.

Keywords: Sudden Stops; Current Account Deficits; Debt (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The empirical dimension of overborrowing (2020)
Working Paper: The empirical dimension of overborrowing (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ake:iiepdt:201945

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