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External Balance in Low Income Countries

Lone Engbo Christiansen, Alessandro Prati, Luca Ricci () and Thierry Tressel ()

No 09/221, IMF Working Papers from International Monetary Fund

Abstract: This paper offers a coherent empirical analysis of the determinants of the real exchange rate, the current account, and the net foreign assets position in low income countries. The paper focuses on indicators specific to low income countries, such as the quality of policies and institutions, the special access to official external financing, and the role of shocks. In addition to more standard factors, we find that domestic financial liberalization is associated with higher current account balances and net foreign asset positions, while capital account liberalization is associated with lower current account balances and net foreign asset positions and with more appreciated real exchange rates. Negative exogenous shocks tend to raise (reduce) the current account in countries with closed (opened) capital accounts. Finally, foreign aid is progressively absorbed over time through net imports, and is associated with a more depreciated real exchange rate in the long-run.

Keywords: Capital flows; Capital account; Cross country analysis; Current account; Developing countries; External financing; External shocks; Financial assets; Foreign exchange; Foreign investment; Foreign aid; Low-income developing countries; Real effective exchange rates; Time series; Terms of trade; real exchange rate, net foreign assets, exchange rate, capital account liberalization, International Lending and Debt Problems, (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
Date: 2009-10-01
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Related works:
Chapter: External Balance in Low-Income Countries (2010) Downloads
Journal Article: External Balance in Low-Income Countries (2010) Downloads
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