Persistent current account deficits and balance of payments crises

Damian Pierri, Gabriel Montes Rojas and José Mira
Authors registered in the RePEc Author Service: Gabriel Montes-Rojas ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: Persistent current account defficits are common among low- andmiddle-income countries. We evaluate when this situation triggers acrisis and characterize it. Using a non-parametric estimator, we finda critical value for the yearly current account defficit just before thecrisis sets of. These findings give rise to a different type of crises:countries that have increased their external indebtedness by an accumulated amount of at least 26%-31% of the GDP in a time span of 3 to 5 years, when they are hit by a crisis, they suffer a more severe recession than an average sudden stop. We call these events persistent balance of payment crises. This generates a consumption fall of 3.1% and a current account reversal 4.9 percentage points. We also contribute to the structural characterization of balance of payment crises. Using a canonical model augmented with an endogenous interest rate, given enough persistence of the GDP, we can replicate these stylized facts. In this sense, the variability of national income in countries which are external net debtors is critical.

Keywords: Persistence; Current; account; Debt; Balance; of; payment; crisis (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2020-02-24
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:34239

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